UAE supports dollar peg, Oman says no alternative to US debt

Reuters, Monday 8 Aug 2011

Emirates will keep its currency pegged to the dollar despite Standard & Poor's downgrade of the world's biggest economy while Oman believes US treasuries risk-free, say officials

The United Arab Emirates will keep its currency peg to the U.S. dollar even after Standard & Poor's downgraded the world's biggest economy, and Oman sees no risk in investing in U.S. treasuries, officials said on Sunday.

Gulf central bankers were huddled in separate meetings on Sunday to discuss the downgrade, sources said.

All Gulf Arab states, except for Kuwait, peg their currencies to the greenback and their fortunes are closely tied to U.S. developments. Gulf states are also major investors in U.S. treasuries.

"We are pegged to the dollar and will keep it. We don't see the dollar collapse. Because the problem is not in the U.S. only, but also in the European markets," Mohamed al-Tamimi, deputy executive director at the UAE central bank's treasury department, told Reuters.

Ratings agency S&P cut the U.S. long-term credit rating by a notch to AA-plus in an unprecedented blow amid concerns about the nation's budget deficits and climbing debt burden. It called the outlook "negative," signaling another downgrade is possible in the next 12 to 18 months.

Tamimi said the downgrade was not unexpected but its timing was earlier than anticipated. The central banker lent verbal support to the U.S. on Sunday, saying there was no alternative to investing in the U.S. market which still remained "the most liquid and a safe market."

The UAE central bank does not hold any U.S. treasury bonds or government financial instruments, it said in July.

"But if the yields go higher to a justified level, there is no reason why we will not invest in U.S. treasuries," Tamimi said on Sunday.

The world's largest oil exporting region has an 'established culture' in favor of the greenback, said National Commercial Bank chief economist Jarmo Kotilaine in Riyadh.

"But we are at an inflection point in that this is causing people to question the role for the dollar and the fundamentals of the U.S. economy," he said. "The road will take us where the dollar's role will be reassessed."

Oman won't make "Irrational Decisions"

Non-OPEC oil producer Oman said on Sunday it would stick with U.S. government instruments and make no "irrational decisions" in the aftermath of S&P's cut.

"Let's say we are closely following the situation and we don't want to make an irrational decision now," said a senior Omani government official, speaking on condition of anonymity.

"In (the) global economic turmoil the world is going through, what other alternative do we have at the moment but to stick with the U.S. government instruments?" he asked.

Kuwait is the only Gulf country which uses a currency basket as a peg, though heavily dollar-weighted. It dropped the dollar peg in 2007 in a bid to rein in inflation.

Policymakers in the Gulf Arab region have long said that dollar pegs serve their hydrocarbon-heavy economies well as long as inflation stays under control.

Central bank officials in Saudi Arabia, Kuwait and Bahrain were not immediately available for comment.

"Saudi has $1.9 trillion invested in the U.S., mostly in Treasury bills. How those are going to be affected, we don't know but we are at the most risk among GCC markets," says a Riyadh-based fund manager who asked not to be identified.

Gulf markets slumped on Sunday on investor jitters about the euro zone debt crisis as well as the U.S. ratings action.

In Oman, the index fell 1.71 per cent to a two-year low. But Saudi Arabia, which slumped 5.5 per cent on Saturday, steadied a day after hitting a five-month low.

Group of Seven finance leaders were set to discuss the twin issues in a conference call.

"There's always a risk on global growth when the biggest economy in the world is going through a tough time," the Omani official said.

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