DUBAI, 22 November 2007 — Kuwait let the dinar make its second-biggest daily gain yesterday since the oil exporter dropped its dollar peg in May, as the US currency’s global slide raised pressure on Gulf neighbors to follow its lead.

The dollar-pegged United Arab Emirates dirham hit a new five-year high and forward rates showed investors betting on appreciations of as much as 3.1 percent in the dirham and 2.7 percent in the Saudi riyal in a year. “The fundamental reasons for a revaluation are so strong that some sort of change in currency regimes is inevitable,” Citigroup Global Markets economist Mushtaq Khan said in a note.

“Economic fundamentals and public pressure may be strong enough to trigger a change in policy direction,” he said.

Pressure on currency pegs has been building since the United Arab Emirates central bank governor said last week he was considering dropping the dollar peg and tracking the dirham against a currency basket to help contain inflation. Yesterday the UAE reiterated that it wanted to shift together with other Gulf states preparing for monetary union as early as 2010. “It’s not a matter of de-pegging,” UAE Finance Minister Hamdan ibn Rashid Al-Maktoum said.

“You need first to have a currency basket at least. And I suggest that this be a basket agreed by Gulf states,” he said in an interview aired by Al-Arabiya television. Kuwait broke ranks with its neighbors and started tracking a currency basket in May. Yesterday it allowed the dinar to gain 0.56 percent versus the dollar as the US currency sank to a record low against the euro.

The dinar has risen 5.35 percent since May 19, a day before the central bank dropped the peg, saying the dollar’s weakness was driving up inflation by making some imports more expensive.

Kuwait gets about a third of its imports from Western Europe, as does the UAE.

“The pressure is rising for other Gulf countries to follow Kuwait,” said Abdul-Wahab Issa Al-Rushood, treasurer at Kuwait Finance House. “I’m not surprised that the dinar has risen, given the dollar’s weakness.”

Apart from driving up import costs, the dollar pegs force Gulf central banks to track US monetary policy at a time when the Federal Reserve is cutting rates and inflation at home is running at its highest this decade.

Rising inflation is undermining the UAE’s efforts to reduce reliance on oil exports, Moody’s Investors Service said on Wednesday. Inflation hit a 19-year high of 9.3 percent last year.

“Inflationary pressures have risen markedly in recent years — stimulated by capacity constraints, strong growth in public expenditure, and the peg to a falling dollar,” the ratings agency said in a report on the second-largest Arab economy.

“This threatens to undermine the competitiveness of nonhydrocarbon sectors,” it said.

The UAE is the Gulf oil exporter that relies least on its energy sector. Oil and gas account for around 27 percent the UAE’s gross domestic product compared with 48 percent in Saudi Arabia, according to Standard Chartered

Saudi Arabia would play a major role in any currency shift, Khan said. Gulf Arab states will probably allow their currencies to appreciate between 4 percent and 5 percent, he said.

The Saudi riyal touched a 21-year high of 3.7050 on Monday.

Saudi Arabia fixed its riyal at 3.75 per dollar in June 1986.

Nine-month forward rates widened price in a 2.1 percent appreciation in the riyal and 2.6 percent for the dirham.

The dirham touched 3.6675 per dollar, its strongest since November 2002. The central bank has fixed the dirham at 3.6725 per dollar since 1997.

Meanwhile, Citigroup said yesterday Oman could keep its rial pegged to the tumbling US dollar and Bahrain may choose to fix its dinar to the Saudi Arabian currency if their Gulf Arab neighbors decide to abandon dollar pegs, Citigroup said on Wednesday.

Oman, which relies very little on oil and gas, may want to keep its currency weak to attract investment in other sectors, Citigroup said.

“We believe Oman prefers a weak currency to help it diversify ... it may remain pegged to the dollar even if others shift,” the bank said.