May 31 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson and Saudi Arabian Finance Minister Ibrahim Al-Assaf agreed that the Gulf kingdom benefits from keeping its currency pegged to the dollar.

The riyal's peg ``has served this country and the region well,'' Paulson said today at a joint press conference in Jeddah. ``I totally agree with Secretary Paulson,'' al-Assaf said. ``As we have said many times, we have no intention of de- pegging or of revaluation.''

Paulson is getting an update on the fixed exchange rates retained by most oil-rich nations in the Middle East on his four-day trip to the region. Gulf officials in April agreed to strengthen efforts to establish a currency union by 2010, diminishing speculation of a quick change to the dollar pegs.

Any change to currency regimes in the region ``is a sovereign decision,'' Paulson said. Forward agreements to acquire Gulf currencies have fallen as investors bet the nations, including Saudi Arabia and the U.A.E., will keep their pegs for now.

Contracts to buy U.A.E. dirhams in one year dropped to 3.59 per dollar yesterday, a 2 percent premium on the spot price of 3.6729, according to Bloomberg data. Twelve-month forwards for Saudi Arabia's riyal slipped to 3.7 versus the U.S. currency, compared with the spot rate of 3.7506. The forward rate has dropped from 3.7803 on Jan. 12, the highest this year.

Gulf states' links to the weakening dollar have driven up prices of imported goods. To maintain their currency pegs, Gulf states must keep their interest rates in line with those in the U.S., hobbling their ability to fight inflation. Consumer prices in Saudi Arabia rose 10.5 percent from a year earlier in April.

Kuwait Drops Peg

Kuwait became the first Gulf Arab state to drop its currency's peg to the dollar in May of last year, citing the rising cost of imports from Europe. The dinar has risen 8 percent against the dollar since then.

On his trip to the region, Paulson is touting the U.S. as an investment destination for Persian Gulf funds flush with $4 trillion thanks to oil prices that have doubled in the past year. He is aiming to persuade Middle East investors to continue putting money in the U.S. as American banks seek to raise capital, while encouraging Gulf countries to avoid political objectives in investing through government-run sovereign wealth funds.

`Protectionist Sentiment'

``The major purpose of my visit is open investment,'' Paulson said. ``The issue that I'm most concerned about, looking globally, is a protectionist sentiment around the world at a time when it makes no sense.''

The Treasury chief said investing in developing better oil production technology as well as alternative energy sources is necessary as oil prices continue to soar.

``There's no doubt that the current prices are a burden on the world,'' Paulson said. ``This situation doesn't lend itself to quick, easy fixes.''

Saudi Arabia, the world's largest oil producer, said during a visit this month by President George W. Bush that it would boost output by 300,000 barrels a day.

``As our oil minister has indicated many times, we are for stability in the oil market,'' al-Assaf said. ``We don't like extreme volatility.''

Crude oil for July delivery has jumped 100 percent in the past 12 months, closing at $127.51 yesterday. That has both hampered U.S. economic growth and spurred inflation. Gasoline reached a record $3.96 a gallon this week, according to AAA.

Credit Crunch

The economic slowdown may add to challenges faced by U.S. financial companies already struggling with the credit crisis.

Financial firms worldwide have raised more than $266 billion since July to offset billions of dollars of losses stemming from the collapse of the U.S. subprime mortgage market. Sovereign wealth funds, the pools of government-run capital set up to enhance returns on reserves, have accounted for as much as one-third of the total.

Abu Dhabi's fund, the world's largest, invested $7.5 billion in Citigroup Inc. in November. Morgan Stanley and Merrill Lynch & Co. have also received capital from Gulf funds.

The U.S. and Europe have pushed for more disclosure from sovereign funds, calling on them to agree to guidelines being drafted by the International Monetary Fund and the Organization for Economic Cooperation and Development.

Strong Dollar

Some countries have resisted. Bader al-Sadd, head of Kuwait's $250 billion fund, said in April that ``imposing regulations on sovereign wealth funds will result in an adverse impact on global capital flows.''

Paulson also reiterated his belief in a ``strong dollar,'' and said the currency will benefit over time from the U.S. economy, which is in ``a tough time'' right now.

``A strong currency, a strong dollar, is very much in our nation's interest,'' he said. ``I believe the long-term economic fundamentals are going to be reflected in our currency.''

The Treasury chief was due to meet with Saudi King Abdullah before flying tonight to Doha, where he will meet with Qatari Finance Minister Yousef Houssein Kamal.

To contact the reporters on this story: John Brinsley in Jeddah at jbrinsley@bloomberg.net

Last Updated: May 31, 2008 14:22 EDT