Saudi Arabia may revalue but keep dollar peg

Saudi Arabia could consider revaluing the riyal with other Gulf oil producers, but has no plans to drop its peg to the tumbling dollar to track a currency basket, a source familiar with Saudi currency policy said.
The kingdom set its exchange rate in 1986 and has never said it is reviewing that policy, even though the dollar's slide has forced Gulf neighbours and other Opec oil exporters to question the wisdom of tying their economies to the US currency.
Any revaluation by the world's biggest oil exporter would be "very small" and designed to keep plans for Gulf monetary union alive, the source said, communicating the Saudi response to growing market expectations of a Gulf exchange-rate shift. The United Arab Emirates, the second-largest Arab economy after Saudi Arabia, ratcheted up those expectations this week by saying it could unshackle its dirham from the dollar and track a currency basket including the euro as Kuwait did this year.
The UAE would only act with Saudi Arabia and other neighbours preparing for monetary union as early as 2010, UAE Central Bank governor Sultan Nasser al-Suweidi told Reuters on Thursday. "We were taken by surprise by his statement," the source told Reuters in the Saudi capital, Riyadh, on Friday, declining to be identified. "His statements contradict everything that has been discussed at the regional level."
"Saudi Arabia will definitely not shift to a basket of currencies," the source said. "We have never discussed dropping the peg to the dollar, whether at meetings of finance ministers or central bank governors." An end to the Saudi peg could weigh on the dollar, which hit a 26-year low against sterling, an 18-month trough against the yen and a record low against the euro this month on concerns about slowing US economic growth after a mortgage crisis.
In September, the US currency hit a low of $1.40 against the euro on speculation Saudi Arabia would scrap its peg, potentially reducing demand for US assets in a region with a $1 trillion in surplus funds.
The Saudi government could consider revaluing the currency, which the central bank has kept stable at 3.75 to the dollar since June 1986, the source said. "We will take time to revalue. If it were to happen, it will be very small, to realign the Gulf currencies with each other," the source said.