ABU DHABI, 10 September 2006 — The United Arab Emirates central bank will watch the impact of US monetary policy on the dollar and wait for a dip in the euro before diversifying its currency reserves, the bank’s governor said yesterday.

The Gulf Arab oil exporter’s central bank decided this year to convert 10 percent of its largely dollar-denominated foreign exchange reserves into euros and gold, but governor Sultan Nasser Al-Suweidi said the switch had not yet been carried out.

With the US Federal Reserve halting a two-year campaign of monetary tightening in August, Suweidi told Reuters he wanted to assess the impact of monetary policy on the dollar. “We are waiting to see the outcome of that decision.

There’s a shift in the strategy of the Fed. That will entail a new strategy on our side,” he said.

“We expect the Federal Reserve will stop hiking interest rates, and (cut) interest rates as a matter of fact, in...6-9 months from now,” he later told reporters after meeting central bankers from the across the world’s top oil exporting region.

With analysts predicting an end to Fed policy tightening, the euro is gaining luster in the eyes of many investors, especially with the European Central Bank expected to keep raising rates into next year.

The dollar has fallen more than 7 percent against the euro this year. It has also declined more than 20 percent against a basket of major currencies since 2001, partly due to concerns about the widening US trade deficit.

Suweidi said the central bank would wait for a dip in the euro before making purchases to diversify its currency reserves, which stood at $23 billion in December.

“Normally you wait for a downtrend to buy and catch it as it goes up,” he said, adding that the UAE central bank favored investing in US corporate bonds rather than government Treasuries because of their relatively attractive yield. He said no decision had been made yet on gold purchases.

Suweidi said the central bank was still committed to diversifying it reserves and that the bank’s board would meet later this month to consider the timing of the switch.

Markets have become particularly sensitive to any suggestion that central banks, especially those in countries with large current account surpluses, are moving some of their holdings away from dollars into euros.

Central banks worldwide hold more than $4 trillion in total reserves.

Gulf Arab central banks account for only about 10 percent of the region’s foreign-exchange reserves, but they offer a rare window on official thinking in the Gulf, where vast surpluses of oil cash are controlled by secretive government-linked investment arms.

The state-owned Abu Dhabi Investment Authority, for example, manages between $450 billion and $500 billion, according to an estimate by Standard Chartered.

Other Gulf Arab central banks are studying the euro’s growing allure as a reserve currency.

A Qatar central bank official said in April the bank was buying euros, which could eventually account for up to 40 percent of reserves.

But the Saudi Arabian Monetary Agency (SAMA) reiterated that there would be no change in its reserve policy. SAMA Governor Hamad Al-Sayari also ruled out any revaluation of the riyal, which like other Gulf Arab currencies has been pegged to the US dollar in the run-up to monetary union in 2010.

Investors betting on a revaluation zeroed in on the currency of the world’s largest oil exporter earlier this year, after Kuwait revalued its dinar, triggering speculation that other Gulf states would follow suit.

Suweidi said the common Gulf currency would probably be pegged initially to one foreign currency, most likely the dollar, rather than a basket of currencies, and then allowed to float a few years after monetary union.