UPDATE 1-Retail rush into UAE dirhams sets scene for funds
Sun Nov 18, 2007 10:30pm IST Email | Print | Share| Single Page[-] Text [+]
(Recasts, adds retail shift into dirhams, quotes)

By Daliah Merzaban

DUBAI, Nov 18 (Reuters) - Investors around the Middle East shifted bank deposits into the United Arab Emirates, betting on an appreciation of its dollar-pegged dirham on Sunday, and traders braced for hedge-fund buying when global markets open.

The central bank may have to cut the rate at which it sells dirhams for the first time in a decade to relieve pressure that began building when the central bank governor signalled last week he could drop the peg to the tumbling dollar, bankers said.

The dirham AED= hit a five-year high of 3.6681 per dollar on Thursday after Sultan Nasser al-Suweidi said he could track a basket of currencies in concert with Saudi Arabia and three oil producers preparing for monetary union as early as 2010.

"There has been a big retail shift into dirhams in the last week," said Jason Goff, head of group treasury and market sales at Emirates Bank International Ltd, part of Emirates NBD ENDB.DU, the largest Gulf lender by assets.

"Clients from Jordan and other countries that peg their currencies to the dollar are going into the dirham because it is a one-way bet," Goff said.

Expatriate Indians living in the UAE are moving dollar holdings into dirham assets, including stocks, real estate and bank deposits, said K V Shamsudheen, director of Dubai-based Barjeel Geojit Securities.

Barjeel advises Indian clients on how to invest money.

One basket that Indians traditionally held money in was dollars. That basket is now empty as people transfer money from dollars to dirhams," Shamsudheen said.


UNDER PRESSURE

The UAE central bank has fixed the dirham at 3.6725 per dollar since 1997, selling dirhams to banks at 3.6720 and buying them at 3.6730.

The bank could reduce the price it sells dirhams to as low as 3.64 per dollar, to make the UAE currency less attractive, said Elyas al-Gaseer, Calyon's treasurer for the Middle East.

"There are a lot of hedge funds, asset managers and private banks that are selling major currencies and buying local currencies because they know the downside is very limited," Gaseer said.

The central bank could widen the spread by 40 ticks to 3.6690 for the first time in at least a decade, said Malcolm D'Souza, head of treasury at RAK Bank in Dubai.

"I don't see them committed to a 10-tick spread in a market under pressure," D'Souza, president of the UAE Financial Markets Association, said.

Suweidi has repeatedly said the UAE would not revalue on its own, so the dirham could come under fresh pressure after a source familiar with Saudi Arabia's currency policy said on Friday the kingdom could consider revaluing its riyal.

One basket that Indians traditionally held money in was dollars. That basket is now empty as people transfer money from dollars to dirhams," Shamsudheen said.


UNDER PRESSURE

The UAE central bank has fixed the dirham at 3.6725 per dollar since 1997, selling dirhams to banks at 3.6720 and buying them at 3.6730.

The bank could reduce the price it sells dirhams to as low as 3.64 per dollar, to make the UAE currency less attractive, said Elyas al-Gaseer, Calyon's treasurer for the Middle East.

"There are a lot of hedge funds, asset managers and private banks that are selling major currencies and buying local currencies because they know the downside is very limited," Gaseer said.

The central bank could widen the spread by 40 ticks to 3.6690 for the first time in at least a decade, said Malcolm D'Souza, head of treasury at RAK Bank in Dubai.

"I don't see them committed to a 10-tick spread in a market under pressure," D'Souza, president of the UAE Financial Markets Association, said.

Suweidi has repeatedly said the UAE would not revalue on its own, so the dirham could come under fresh pressure after a source familiar with Saudi Arabia's currency policy said on Friday the kingdom could consider revaluing its riyal.