Dollar Falls as Gulf States Will Discuss Currency Revaluation

By Stanley White and Kosuke Goto

Nov. 19 (Bloomberg) -- The dollar fell against the yen after a group of six Arab nations said they will consider changing their fixed exchange rates to the U.S. currency.

The six member countries of the Gulf Cooperation Council that includes Saudi Arabia and the United Arab Emirates will discuss a proposal next month to revalue their currencies, Secretary General Abdul Rahman al-Attiyah said yesterday. The dollar declined against eight of the 16 most-active currencies on speculation a U.S. government report tomorrow will show housing starts fell to a 14-year low.

"The U.S. dollar is weaker across the board on the talk of a move away from the dollar peg," said Sue Trinh, a senior currency strategist in Sydney with RBC Capital Markets, the second-most accurate forecaster in the second quarter in Bloomberg news surveys. "The bearish dollar sentiment will continue with the housing data."

The dollar fell to 110.47 yen at 6:41 a.m. in London from 111.09 late in New York on Nov. 16. The U.S. currency was at $1.4666 per euro from $1.4662 late last week. The euro traded at 162.04 yen from 162.86 yen. The dollar may find support, an area where buy orders are clustered, at $1.4685 per euro, Trinh said.

The U.S. currency also declined to 6.68 South African rand from 6.715 on Nov. 16 and to 75.92 U.S. cents per New Zealand dollar from 75.70.

The Gulf oil-producing nations are under pressure to scrap the pegs after the dollar weakened to a record low against an index of six major currencies.

Gulf Currencies
The difference between the price of the Saudi Arabian riyal and the cost of buying it in a year using forward contracts has has widened 10-fold since October, closing at 3.68 on Nov. 16. The riyal spot rate was quoted at 3.7235 by BNP Paribas Bahrain, from a close of 3.7295 on Nov. 16.

The proposal to change the value of the currencies of the Arab nations will be considered when heads of state of the Gulf Cooperation Council attend a summit in Doha, Qatar, on Dec. 3-4, Secretary General al-Attiyah said.

Faster growth and rising import prices caused by the sinking dollar are spurring inflation. Saudi Arabia's consumer prices rose at a record 4.9 percent pace in August, after averaging less than 1 percent over the last decade, government figures show.

Gulf central banks are already preparing for an exchange rate regime that doesn't require dollars to defend.

Dollar Peg
United Arab Emirates central bank Governor Sultan Bin Nasser al-Suwaidi last week said his bank has a target of moving 10 percent of its currency reserves into euros and has "already diversified to some extent." The $50 billion Qatar Investment Authority said Sept. 4 it was looking to buy assets in Asia to counter a weak dollar.

"The dollar peg is doomed," Jim Rogers, chairman of New York-based Rogers Holdings and a former partner of hedge fund manager George Soros, said in an interview last week.

The GCC comprises Saudi Arabia, U.A.E., Qatar, Oman, Bahrain and Kuwait. Kuwait switched to managing its currency against a basket in May.

Saudi central bank Governor Hamad Saud al-Sayari said in an interview at the weekend that Gulf central bank governors agreed not to change their exchange-rate policies after discussing revaluation a few weeks ago. Saudi Arabia fought off Iran and Venezuela's attempt to get the Organization of Petroleum Exporting Countries to discuss pricing oil in different currencies at a summit this weekend in Riyadh.

Housing Data
The dollar is weaker versus 13 of the 16 most-active currencies this quarter before a report tomorrow that economists say will show housing starts in the U.S. fell to a 14-year low in October, signaling the real-estate slump will continue to weigh on economic growth.

The U.S. currency has declined 4.4 percent against the yen and 3.6 percent against the Swiss franc in November as the worst housing market in 16 years caused the Fed to cut rates to 4.5 percent and companies reported more losses on securities tied to U.S. subprime mortgages.

Signs of a cooling economy has prompted traders to increase bets that the Federal Reserve will lower interest rates again this year, diminishing the allure of the nation's assets.

"The U.S. housing slump has not bottomed out yet," said Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan's largest publicly traded lender by assets. The Fed may cut rates to 2.5 percent by the end of 2008 and the dollar will keep suffering, Mizuno said.

The dollar may fall to 100 yen this year, Mizuno said.

The U.S. Dollar Index traded on ICE Futures U.S. in New York, which includes the euro, British pound and Japan's yen, reached a record low of 74.978 on Nov. 9, the weakest since the index started in 1973. It last stood at 75.770.

Dollar Shorts
Interest-rate futures traded on the Chicago Board of Trade show a 90 percent chance the Fed will lower its benchmark rate a quarter-percentage point to 4.25 percent on Dec. 11.

Losses in the dollar against the euro may be limited as some investors reduced bets on the currency before Thanksgiving Day in the U.S. on Nov. 22, according to Yuji Saito at Societe Generale SA.

"Investors will buy back the dollar to reduce short-dollar positions going into the long break," said Saito, head of the foreign-exchange sales department in Tokyo at France's third- biggest lender. "Traders want to close the positions to some extent before that." Short positions are bets that a currency will fall.

The U.S. currency may move between $1.46 and $1.47 a euro today, Saito said.

Futures traders decreased their bets that the dollar will fall against the euro, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 16.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 69,429 on Nov. 13, compared with net longs of 76,048 a week earlier.