The United Arab Emirates central bank on Monday started lending dollars to banks against their certificates of deposit after bets the Gulf state will revalue its dollar-pegged dirham led to a shortage in the US currency.
Bankers welcomed the move, saying the central bank's rates were competitive and could help them meet foreign currency needs.
Dollar reserves at the UAE central bank have building up as people hold more of their assets in dirhams on speculation the country will revalue.
Banks can borrow dollars up to $200 million (Dh734m) a day at 3.25 per cent for one-week CDs, 3.15 per cent for one-month CDs and 3.05 per cent for three-month CDs, the central bank said.
"The central bank has opened a window of liquidity for banks to borrow dollars at good value," said Jason Goff, head of group treasury and market sales at Emirates NBD, the Gulf's largest lender by assets.
"Some banks have been struggling to attract dollar deposit at rates which are attractive," he said.
The one-month London Interbank Offered was 3 per cent on Monday, but some banks were paying as much as 4 per cent for dollars, Goff said.
The central bank said on Sunday the facility was designed to help banks meet their foreign currency needs "in view of the current credit crisis in the international financial markets".
The UAE, the world's fifth largest oil exporter, pegs its dirham currency to the dollar, which hit record lows against the euro and a basket of major currencies last week.
Investors have renewed bets on a revaluation of the dirham as dollar weakness and the prospect of further US Federal Reserve interest rate cuts places pressure on Gulf Arab dollar pegs as inflation rises to near-record peaks across the region.
Analysts, including Goff, said the central bank's move to provide dollar liquidity could signal its commitment to keeping its currency pegged to the dollar at the same rate.
The dollar peg has served Gulf economies "very well" and helped the region prepare for monetary union, UAE Central Bank Governor Sultan Nasser Al Suweidi said last month.
Al Suweidi has reiterated the oil producer's commitment to its peg since calling for currency reform in November, when the dirham hit a 17-year peak.
Bets on a revaluation of the dirham receded on Monday. Dirham forward rates showed investors betting on a 2.3 per cent rise in the currency in a year, down from more than 3 per cent last week. (Reuters)
Central Bank lends dollars amid FX bets