Bahrain may choose to fix its dinar to the Saudi Arabian currency if other Gulf countries decide to abandon dollar pegs, a report said.

Oman could keep its rial pegged to the tumbling US dollar, Citigroup was quoted as saying by Gulf Daily News.

Expectations that Gulf countries will reform fixed exchange rates has mounted in the past week after the UAE central bank governor said he could track a basket of currencies in concert with Gulf neighbours to help contain inflation.

The Saudi Arabian riyal hit a 21-year high this week after a source familiar with Saudi policy said that Riyadh could consider a revaluation to keep plans for monetary union with five other Gulf states alive.

The source said Bahrain, Qatar, the UAE and Saudi Arabia - but not Oman - could shift together to a common fixed exchange rate against the dollar to 'facilitate monetary union'.

Oman, which has less oil and gas reserves on which to rely, may want to keep its currency weak to attract investment in other sectors, Citigroup said.

'We believe Oman prefers a weak currency to help it diversify ... it may remain pegged to the dollar even if others shift,' the bank said.

Bahrain's central bank governor said on Sunday there was no change to the country's exchange rate policy after its neighbours indicated they were considering revaluing their currencies.

'If there is a currency shift in the region, Bahrain may simply peg its currency to the Saudi riyal as it is heavily dependent on the Saudi economy,' Citigroup said. – TradeArabia News Service