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Riyadh: Gulf central bankers will try to revive plans for regional monetary union on Saturday at a meeting that may give investors an insight into currency policy after a summer of Kuwait revaluations and market turmoil.
Kuwait plunged the monetary union project into crisis in May by dropping a dollar-pegged exchange rate regime it had agreed would stay in place until the region created a single currency in 2010.
Kuwait's central bank said it broke ranks with Saudi Arabia and four other oil producers because the dollar's slide on global markets was fuelling inflation by making some imports more expensive.
Central bankers from Saudi Arabia, Oman, Qatar, Bahrain and the UAE, some contending with higher inflation rates than Kuwait's, have repeatedly ruled out any change to currency policy.
The meeting in Riyadh on Saturday and Sunday will be the first opportunity for them to publicly tackle the issue in about two months.
In that time, The dollar tumbled to a record low against the euro and 26-year trough against sterling in July.
Changes
Kuwait allowed the dinar to appreciate 1.74 per cent on July 25, the biggest of 18 rate changes so far this year, pushing the currency to an 18-year high. Investors betting other countries would follow drove the UAE dirham and Saudi riyal higher.
US home loans defaults triggered a global credit crunch, raising expectations the US Federal Reserve would cut interest rates next week and press most Gulf central banks follow its lead, ignoring rising inflation at home.
Official data showed inflation hitting a seven-year high of 3.83 per cent in Saudi Arabia in July, a two-and-a-half year high of 5.9 per cent in Oman in June and 12.8 per cent in Qatar at the end of the second quarter.
Kuwait's data showed annual inflation at 12-year highs in April and May, before falling to 4.36 per cent in June, the first full month that the dinar tracked a currency basket.
"They have some real issues to wrestle with," said Simon Williams, senior regional economist at HSBC in Dubai. "Over the last six months, the weakness of the US dollar and rising levels of inflation have made the shortcomings of existing foreign exchange regimes increasingly apparent."
An April central bankers' summit to try to revive monetary union ended inconclusively, and Standard Chartered put the chances of meeting the 2010 deadline at less than 20 per cent.
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