The US dollar is seen to drop further to 1.75 against the euro by end-2009, although it would appreciate to 1.49 by the end of this year, according to Standard Chartered Bank officials.

They also stressed the need for the UAE and four other Gulf countries to revalue their currencies and gradually move to a currency basket.

The dollar pegs being maintained by Saudi Arabia, Bahrain, the UAE, Oman and Qatar are not providing them with enough policy tools to tame inflation, brought about by high liquidity, food prices and housing costs, especially that the US Federal Reserve has cut interest rates to help ward off a recession, they said.

These countries have to revalue their currencies quickly but move carefully towards a basket of major currencies by starting with the euro and the US dollar, suggested Mary Nicola, an economist at Standard Chartered Bank specialising in the Mena region.

"Just keep it simple first," she said.

She added that abandoning the dollar-peg and revaluing their currencies would make the Gulf countries regain their monetary tools, and not just track the Fed's policy, and absorb liquidity. It would be difficult to control inflation with the dollar pegs in place due to the problem of valuation and low interest rates that deter authorities from mopping up excess liquidity, she said.

Marios Maratheftis, regional head of research, Middle East, Pakistan and North Africa at Standard Chartered Bank, said that doing away with most inflationary pressures in the Gulf through less public spending is unlikely to happen, GCC countries are using their high budget surpluses from high oil export receipts to diversify their economies.