Arab sheikdoms follow Fed lead

Dubai, United Arab Emirates -- Oil-rich Arab sheikdoms sought to keep their currencies in line with the American dollar Thursday by lowering interest rates, a report says.

Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain followed the U.S. Federal Reserve's decision to cut interest rates by a quarter percentage point, the Wall Street Journal said in a report from Dubai.

Because exchange rates are pegged to the dollar in fixed trading ranges, monetary policy in the Persian Gulf States must mirror U.S. moves. Otherwise, the report says, there could be pressures from capital drifting to the currency with the most favorable interest rates.

The moves came despite concerns over rampant inflation in the region, which suggest central banks should be raising instead of lowering rates to defend their dollar position. Bankers said the policy conflict is building pressure on those states to disconnect their economies from the dollar.

Nowhere in the Middle East are the strains reported more acute than in the U.A.E., the Middle East's second-largest Arab economy.

Investors are said to be betting heavily on a "depegging" of the local dirham currency as domestic inflation pressures increase.

© 2007 United Press International.