May 21 (Bloomberg) -- Kuwait's decision to abandon a peg to the dollar, the first such move by a Middle Eastern country, may put pressure on the United Arab Emirates and Qatar to do the same as inflation accelerates.

The dinar rose 0.4 percent against the dollar after Kuwait ended the peg and switched to a basket of currencies. A slump in the dollar has pushed up the cost of imports from Europe and Asia for Middle Eastern consumers. Yesterday's decision may make it more difficult for Kuwait to meet a timetable to join five other Gulf Arab monarchies in forming a single currency by 2010.

``The perception in the market is that Kuwait will be a leader,'' said Monica Fan, global head of foreign-exchange strategy at RBC Capital Markets Ltd. in London. The central bank's decision will probably ``increase speculation in the market that the other central banks will make similar moves.''

The Qatar riyal strengthened 0.01 percent today, the most since Feb 9. The U.A.E. dirham gained the same percentage, its biggest advance in a week. The Saudi riyal was unchanged.

Kuwait's central bank held the dinar steady today after the currency strengthened yesterday. It bought the dinar at 0.28811 to the dollar and sold at 0.28801, the same rates as yesterday.

Governor Sheikh Salem Abdul Aziz al-Sabah first suggested a shift in policy in December, saying he would consider revaluing the dinar should inflation remain higher than its 2 percent target. Inflation in Kuwait averaged 3 percent last year, central bank figures show.

Inflation Risk

Inflation in the U.A.E. and Qatar are even higher. Price gains in Qatar accelerated to a record 11.83 percent in 2006, according to the country's Planning Council. In the U.A.E. they reached 10.1 percent, from 7.8 percent in 2005, according to the International Monetary Fund.

``The U.A.E. remains the most at risk of abandoning its peg,'' said Dorothee Gasser, a Middle East and Africa economist at ING Bank NV in London. ``The dollar is still important with regards to trade flows in the region. It's unlikely to happen in the short term.''

Qatar will keep the riyal's peg to the dollar, the Al-Sharq newspaper reported today, citing Central Bank Governor Abdullah Bin Saud Al-Thani. The central bank of the U.A.E. wasn't immediately available for comment.

The Kuwaiti dinar, which had been pegged to the dollar since the beginning of 2003, was little changed today. The currency strengthened about 6 percent against the dollar when it was linked to a basket of currencies between 1975 and the end of 2002, according to data compiled by Bloomberg.

Single Currency

``We may see greater volatility coming through in coming days,'' said Steve Brice, an economist at Standard Chartered Bank Plc in Dubai.

Options traders increased bets today on fluctuations in regional currencies. So-called implied volatility on the one- year Kuwaiti dinar options gained about 1 percentage point, according to data from Standard Chartered in New York.

Volatility on U.A.E. one-year dirham options edged up about a quarter of a percentage point to 1.75 percent.

The dinar was previously allowed to trade 3.5 percent either side of a central rate of 0.29963 to the dollar.

The six Gulf Arab monarchies of Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain plan to form a single currency by 2010. Kuwait remains committed to the plan and will support all efforts to achieve it, al-Sabah said yesterday.

``I don't think they are going to reach the target by then,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``I think they have the inflation problem to begin with. The date looks overly ambitious.''

The dinar was first introduced in 1960 a year before Kuwait gained independence from the U.K. Previously the country used the Persian Gulf rupee, linked to the Indian currency.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

Last Updated: May 21, 2007 10:59 EDT