The United Arab Emirates central bank said it would let lenders in the Gulf state borrow in dollars against their certificates of deposit, after bets on a dirham revaluation led to a dollar shortage.
Starting from Monday, banks in the world's fifth-largest oil exporter -- which pegs its currency to the dollar -- will be able to borrow dollars for as long as three months or at the maturity of their dirham CDs, whichever is less, the central bank said in a statement on Thursday.
"The facility is being granted to banks to meet their foreign currency requirements," Mohammed Abdulla Al Tamimi, assistant executive director in the central bank treasury department, said in the statement.
Further details would be given later, the central bank said.
"There's a shortage of dollars in the market because everyone is betting on a revaluation of the dirham," said Jason Goff, head of group treasury and market sales at Dubai's Emirates NBD, the Gulf's largest lender by assets.
The euro has gained about 30 percent against the dollar in the last two years, making some imports to the Gulf more expensive and helping fuel inflation in the world's largest oil-exporting region to near records.
All Gulf producers, bar Kuwait, peg their currency to the dollar.
Kuwait dropped it in May for a basket that includes the dollar and the euro, citing rising imported inflation. Its currency has appreciated 6.34 per cent.
Surging consumer prices, fuelled as record oil prices boost economic expansion, has encouraged investor speculation that some Gulf states -- especially the UAE and Qatar -- will revalue their currencies or drop the dollar peg altogether to ease inflation.
"This indicates to me that the UAE is not going to revalue any time soon," Goff said of the central bank measures. With a shortage of dollars, the cost of interbank borrowing in the currency in the second-largest Arab economy has risen as much as four-fold during the last year, he said.
Gulf Arab currency forwards strengthened on Tuesday as investors renewed bets that the plunging dollar and fears of a U.S. recession would compel Gulf states to change their dollar pegs.
Forward rates showed investors expecting the UAE dirham and Qatar riyal will rise 3.3 per cent and 4.7 per cent in a year, respectively.
Gulf Arab bankers and economists said November a UAE switch to a certificates of deposit auction to guide interbank lending rates, rather than a fixed rate system, was unlikely to deter speculation in the UAE dirham.
Previously, the central bank guided interbank borrowing costs by selling dirham-denominated certificates, cutting them when it needed to deter bets on a dirham appreciation.
With the switch, the UAE also allowed its first repurchase agreements, and offered its first euro and dollar CDs. (Reuters)
UAE central bank to offer dollar loans