The United Arab Emirates dirham will appreciate 5 percent in 2009 as faster inflation in the Gulf state forces the central bank to ditch its 30-year peg to the dollar peg next year, according to CFC Seymour Ltd.

The central bank of the U.A.E. will drop the dollar peg by June of next year, linking the dirham to a basket of currencies, including the dollar and the euro, Hong Kong-based currency analyst Carol Chan said in a phone interview yesterday. The dirham will rise to 3.49 to the dollar from its peg rate of 3.6725 today, said Chan.

Inflation in the second-largest Arab economy accelerated to 11.1 percent in 2007 from 9.3 percent in 2006 as rent surged while the weaker dollar and higher global food prices made imports more expensive. With monetary policy tied to the U.S., the U.A.E. has put price caps on basic foods and building materials in an attempt to control prices.

"The people are paying more for a liter of water than oil, and that's damping the people's purchasing power," Chan said. "A change in the currency regime is possible after the second quarter" because the dirham's weakness added to the higher cost of imports, she said.

Continued at Bloomberg.com