Central banks of Gulf Arab oil exporters vowed on Tuesday to maintain exchange rate policy in the face of possible delays to a monetary union plan and market pressure to loosen pegs to the falling dollar.
Six central bankers meeting in Saudi Arabia confirmed market expectations a 2010 deadline for monetary union may not be met, a key reason why investors are betting some Gulf states may allow their currencies to appreciate to contain inflation.
Kuwait, the country named in a Reuters poll last month as the top candidate for revaluation, fired its third salvo in a battle with currency speculators on Tuesday by cutting the coupon on its benchmark bonds before a weekend auction.
The central bank of the United Arab Emirates backtracked an interest rate cut on Monday, a sign, analysts said, of just how difficult a path the central banks must tread.
"I don't think this rules anything out yet," said Caroline Grady, London-based economist at Deutsche Bank, which estimated in January that some Gulf currencies were undervalued against the dollar by as much as 30 percent. "Kuwait has always had more flexibility than the rest. The UAE moves were not big enough to put people off."
With most analysts in the Reuters poll last month agreeing that the 2010 deadline was unattainable, markets have been watching the meeting in Medina, Saudi Arabia, for any sign of progress that could relieve pressure on currency pegs.
The talks produced little more than confirmation that Kuwait, Qatar, the UAE, Saudi Arabia and Bahrain would need to make an extraordinary effort to create a single currency in the world's top oil exporting region by 2010.
Oman, the sixth country, was still not ready to join, Saudi Arabian Monetary Agency governor Hamad Saud al-Sayyari told reporters. Oman's announcement last year that it would miss the deadline ratcheted up speculation on currency markets.
"Everybody agrees on the importance of achieving monetary union," Sayyari said. "The schedule seems to be very ambitious and the timeline may be tight but we didn't decide to introduce any amendments to the schedule at the present time," he said.
A second day of talks was scheduled but abruptly cancelled at the last minute. "Issues that were supposed to be debated in the initial programme have all been dealt with today," a Saudi central bank official said.
The six central bankers made little progress on monetary union criteria, with Qatar yet to agree on how to measure the inflation target, a source at the regional Gulf Cooperation Council said.
An inflation target of no more than 2 percent above the average for the six states is the most contentious among the European Union-style convergence criteria for monetary union.
Most countries prefer to measure headline inflation but Qatar wants to use core inflation, stripping out the impact of rents which soared last year, lifting its annual inflation rate to 11.83 percent, the highest on record.
"Qatar has not changed its mind," the source said. Kuwait and the UAE have also voiced concern about inflation, as the dollar fell around 10 percent against the euro last year, driving up the cost of some Gulf imports.
The only significant point of agreement so far appeared to be on exchange rates. "It was agreed to keep the current foreign exchange rate policies," Sayyari said.
Gulf currencies largely shrugged off his remarks. "What has been announced so far is close to market expectations," said Simon Williams, economist at HSBC in Dubai.
The Saudi riyal touched a two-week high of 3.7485 to the dollar early in the session but fell to 3.7501. The UAE dirham weakened to a week-low of 3.6720 per dollar. The Kuwait dinar eased to 0.28909 per dollar, just off the 3-month low hit last week when the central bank threatened to take on speculators betting on a dinar appreciation.
It followed up by cutting the repurchase rate on Sunday and intervention rate on Monday and the coupon rate on its benchmark one-year bonds to 5.5 percent from 6.75 percent on Tuesday - all to make dinar-denominated assets less attractive.
The UAE central bank showed just how difficult it could be to sustain such policy easings by reversing Monday's five basis point cut on its certificate of deposit rates on Tuesday.
The UAE move was too small to make an impact and most Gulf central banks had little room for manoeuvre without deviating from their policy of shadowing the US Federal Reserve, said Giyas Gokkent, head of research at National Bank of Abu Dhabi.