March 17 (Bloomberg) -- The United Arab Emirates, conceding to U.S. pressure and a desire to act in concert with Gulf allies, will keep the dirham pegged to the dollar, a U.A.E. central bank official said.

U.S. Embassy officials last week told central bank Governor Sultan Bin Nasser al-Suwaidi of their concern about reports that the sheikhdom may drop the peg, the official said yesterday, speaking on condition of anonymity. Political leaders have stopped the bank from developing any plans to move toward another currency regime, the official said. U.S. Embassy spokesman Atalah Hoshan in Abu Dhabi wasn't immediately available for comment.

Abandoning the link would risk further weakening the dollar as the U.S. economy falters and the Federal Reserve battles a crisis of confidence in financial markets. The oil-rich Gulf states, including Saudi Arabia and the U.A.E., depend on the U.S. for political and military backing and are unlikely to abandon their closest ally at a time of financial turmoil, said Anoushka Marashlian, senior Middle East analyst at Global Insight in London.

``The U.S. has always been the guarantor of U.A.E. military security,'' Marashlian said. ``The U.A.E. wouldn't do anything to compromise that relationship.''

Gulf central banks are under pressure to drop the peg or revalue their currencies after the dollar lost 17 percent of its value since the beginning of last year, and the U.S. began cutting interest rates. Still, Hamad Saud al-Sayari, governor of the Saudi Arabian Monetary Authority, said on March 12 the dollar is a ``good buy'' and is undervalued.

Dollar Impact

The Fed's weekend cut in the discount rate accompanied a pledge to provide as much as $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.

The weaker dollar makes imports more expensive while lower rates increase the money supply and stoke inflation. The central bank official gave no indication as to how long the bank will hold off moving toward a new currency regime.

The six members of the Gulf Cooperation Council, which includes Saudi Arabia, have agreed to coordinate monetary policy in the run-up to the launch of a single currency in 2010.

Al-Suwaidi, in a Jan. 3 interview, said the U.A.E. would keep the dirham's 30-year peg to the dollar until at least the end of this year after completing a review of its currency regime. Two months earlier he said the U.A.E. was considering dropping the peg and linking to a basket of currencies.

Forward contracts to buy dirhams in 12 months time rose to a record 3.56 on March 14, 3 percent above the spot price, on expectation that the U.A.E. will revalue the dirham against the dollar to stem accelerating inflation.

U.A.E. consumer prices rose 9.8 percent in 2007, according to a Bloomberg survey of economists, up from 9.3 percent in 2006.

To contact the reporter on this story: Matthew Brown in Dubai at mbrown42@bloomberg.net

Last Updated: March 17, 2008 13:47 EDT