Reuters 
 
Riyadh, Nov 20: — Gulf currencies rallied yesterday after United Arab Emirates policymakers called for a regionwide review of dollar-pegged exchange rates.

The Saudi Arabian riyal hit a new 21-year high on the first international trading day since a source familiar with Saudi currency policy told Reuters that the world’s largest oil exporter could consider revaluing its dollar-pegged currency.

Investors in forward markets bet the riyal and UAE dirham would appreciate 1.43 percent and 3 percent respectively in a year’s time, expecting that Gulf Arab oil producers will unshackle their currencies from the tumbling dollar as Kuwait did in May. Kuwait’s dinar has appreciated 4.69 percent against the dollar since it started tracking a currency basket on May 20, blaming the greenback’s slide for driving up the cost of imports.

UAE Central Bank Gov. Sultan Nasser Al-Suweidi said last week he too could start tracking a currency basket including the euro, but would only act along with Saudi Arabia and three other oil producers preparing for monetary union as early as 2010.

The UAE is under mounting social and economic pressure to drop the peg, Suweidi said on Thursday in an interview that drove the dirham to a five-year high.

Political and business leaders in the UAE, the second-largest Arab economy, are discussing possible changes to the dollar-peg policy, said Omar ibn Sulaiman, governor of the Dubai International Financial Center. The UAE, the world’s sixth largest oil exporter, is under the greatest pressure to review foreign-exchange policy.

Any change should be agreed with other Gulf states, he said. Saudi Arabia could revalue the riyal but will not drop the dollar peg to track a currency basket, the source said on Friday, communicating the Saudi response to market expectations of a Gulf exchange-rate shift.

Saudi officials including the central bank governor and finance minister have repeatedly ruled out changing the riyal’s exchange rate, which was fixed at 3.75 to the dollar in 1986.

Bids on the riyal were as strong as 3.7050 at 0750 GMT, their highest since the riyal’s rate was set in June 1986. At 0830 GMT, bids on riyal forward rates were for an appreciation of 1.3 percent to 3.70 per dollar in a year. Bids had hit as strong as 3.6965, a 1.43 percent rise, earlier. Bids on one-year forwards for the United Arab Emirates dirham were pricing in a rise of more than 3 percent to 3.5615 per dollar at 0840 GMT. The dirham spot rate is fixed at 3.6725 by the central bank.