Gulf FX reform pressures remain amid dollar rally

By Daliah Merzaban

DUBAI (Reuters) - The case for Gulf oil producers to switch to flexible exchange rates to fight high inflation and strengthen their currencies will not go away even as the U.S. dollar's rebound buys them time to rethink their dollar pegs.

Gulf policymakers who faced growing popular pressure to revalue their currencies have been relieved as the greenback recouped most of its 2008 losses and the U.S. Federal Reserve stopped slashing interest rates.

Yet while the dollar rebound will dampen inflationary pressures by easing the cost of food and commodity imports to the desert states, their booming economies -- and monetary policy needs -- remain out of step with the United States.

"The case for currency reform is still strong even if the pickup in the value of the dollar has made it less urgent," said Simon Williams, senior economist at HSBC in Dubai.

"The Gulf is a fast-growing, dynamic economy that would benefit immensely from having control over its own monetary policy."

Even before the dollar began rising in late-July, Gulf policymakers threw their support behind reviving a regional plan to create a single currency, and managed to ward off bets other states would follow Kuwait's lead and sever their dollar pegs.

Kuwait started tracking an undisclosed currency basket in May 2007, when the euro-dollar was $1.34, arguing that dollar weakness was stoking inflation by making imports more expensive.

Gulf currencies remain weak as their economies, set to soar past $1 trillion in size this year, defy a global economic downturn on a more than five-fold rise in oil prices since 2002.