Declining to name the institutions involved, Rasheed Mohammed al-Maraj says: “There are foreign institutions packaging investment products based on currency revaluation, while their analysts are propagating the revaluation story and spreading rumours. It is a clear conflict of interests and we look at this very suspiciously.”

It is the latest sign of increasing pressure on GCC states to revalue their currencies to take account of the large falls in the value of the dollar. At the same time, more banks are cutting back on the amount of lending they are doing in dollars, and companies are increasingly offering bond issues in local currencies.

Al-Maraj says while Bahrain is not receiving the same level of attention from currency speculators as the UAE and Saudi Arabia, currency investments have clearly been made on a revaluation of the dinar. If Bahrain were targeted by these investment products, Al-Maraj says he would take action against the banks involved.

The Central Bank of Bahrain recently cut its overnight deposit rates by 50 basis points to discourage short-term speculation on the dinar. Al-Maraj has also reiterated the bank's policy of maintaining its peg to the dollar.

However, growing uncertainty over the fate of the dollar is now hampering the flow of investments across the region and the working of the capital markets. Speculation about a currency revaluation has increased in the run-up to the GCC summit in early December, and banks are becoming nervous about investing in dollar-denominated debt from the Middle East, because of fears that it may soon drop in value.

Speculators are driven by the belief that US interest rate cuts, aimed at boosting liquidity in the US, are increasingly inappropriate for the Middle East, which is awash with cash as a result of the booming oil price.

“Governments in the Gulf need to clarify their intentions on the currency issue, so the markets can get back to business,” says one London-based banker who specialises in advising Middle East companies. “A lot of banks are not looking to lend much in dollars to the region at the moment, and are hoping to ride it out until the end of the year.”

The expectation that a revaluation will occur is prompting others to wait. Dubai Electricity & Water Authority (Dewa) recently shelved plans to sell $2.5bn worth of Islamic bonds because of rising debt costs stemming from the global credit crunch and uncertainty about the UAE's peg to the dollar.

Others are taking a similar line. “I have had clients in Qatar say to me that they are putting off investing in US assets because they think a revaluation is coming,” says one private banker in Doha.

Bonds are increasingly being issued in local currencies, including a landmark Islamic bond from UAE-based Jebel Ali free zone (Jafza). It closed a AED7.5bn ($2bn) issue, the largest sukuk to be issued in dirhams, on 20 November.

“Given the turmoil we are seeing in the international market, a lot of our clients in the UAE will look at the possibility of issuing in dirhams,” says Gilles Franck, capital markets managing director for the Middle East and North Africa at Standard Chartered Bank.

“If Jafza had done the same size issue in dollars, it would have had to pay more.”
The benefits to companies of issuing bonds in local currencies include avoiding a currency mismatch between funds borrowed and revenues generated and better liquidity.

Dubai Holding, Emirates Airline and Abu Dhabi Commercial Bank have all issued debt in dirhams.
“We are seeing a transition in investor mentality regarding risk,” says Brad Levitt, group head of capital markets at Standard Chartered.

“A year ago, investors looked at dollars or euros; now they are looking at local currency.”
Most issues are still sold in dollars. Ras al-Khaimah Investment Authority closed its $325m sukuk on 26 November.

However, the strong market in the first half of the year, has meant many banks are approaching the end of the year having already beaten their targets, leaving them in no rush to fund deals that could rapidly become much less profitable if currencies are revalued.

Expectations that the US Federal Reserve will make further interest rates cuts soon will put additional pressure on the GCC to cut ties to the weakening dollar.