Saudi Arabia could consider revaluing the riyal with other Gulf oil producers, but has no plans to drop its peg to the sliding dollar to track a currency basket, a source familiar with Saudi currency policy said.

Any revaluation by the world's biggest oil exporter would be "very small" and designed to keep plans for Gulf monetary union alive, the source said, communicating the Saudi response to growing market expectations of a Gulf exchange-rate shift.

The United Arab Emirates, the second-largest Arab economy after Saudi Arabia, ratcheted up those expectations this week by saying it could unshackle its dirham from the dollar and track a currency basket including the euro as Kuwait did this year.

The UAE would only act with Saudi Arabia and other neighbours preparing for monetary union as early as 2010, Sultan Nasser Al-Suweidi told Reuters on Thursday.

"We were taken by surprise by his statement," the source told Reuters in the Saudi capital, Riyadh, on Friday, declining to be identified. "His statements contradict everything that has been discussed at the regional level."    

"Saudi Arabia will definitely not shift to a basket of currencies," the source said. "We have never discussed dropping the peg to the dollar, whether at meetings of finance ministers or central bank governors."    

The Saudi government could consider revaluing the currency, the source said. Until now, the kingdom has never said it would review the riyal's exchange rate, which the central bank has kept stable at 3.75 to the dollar since June 1986.

"We will take time to revalue. If it were to happen, it will be very small, to realign the Gulf currencies with each other," the source said.

"But it's not going to happen in the short-term. The kingdom will not take unilateral steps towards revaluation," the source added, declining to elaborate on the size or timeframe of any shift.

The riyal hit a 21-year high of 3.7148 per dollar on Friday after Suweidi's remarks.

Qatar, Bahrain, the UAE and Saudi Arabia could shift together to a common fixed exchange rate against the dollar to "facilitate monetary union", the source said.

The four countries had agreed with Oman and Kuwait to keep their currencies pegged to the dollar until monetary union in the world's biggest oil-exporting region in 2010.

But Oman opted last year not to meet the deadline and Kuwait threw the project into disarray in May when it started tracking the dinar's reference rate against a currency basket, saying the dollar's weakness was making some imports more expensive.

Concerns about slowing U.S economic growth in the wake of mortgage market meltdown have driven the dollar to a 26-year low against sterling, an 18-month low against the yen and record lows against the euro and a basket of six currencies this month.

Apart from driving up import costs, dollar pegs force central banks to track US monetary policy to maintain the relative value of their currencies at a time when the Federal Reserve is cutting rates and Gulf inflation is at decade highs.

Suweidi said the UAE was under growing social and economic pressure to drop its peg and that the rulers of the six states could agree to change currency policy at any time. The next regional summit is scheduled for December.

"The leaders will not discuss dropping the peg to the dollar," the source said of the summit. - Reuters