UAE one-year currency forwards fell to an 11-month low on Monday helped by  improved liquidity in the banking system, indicating the Opec member's dirham would keep near its US dollar peg.

One-year dirham forwards edged down to -5.5/5.5 points on Monday, compared with Friday's close of 6/11 points, traders said.

The level below zero implies bets that the currency of the world's third largest oil exporter will be stronger than its 3.6725 peg to the greenback over next 12 months, pricing in better lending conditions and a stronger economy recovering from Dubai's debt crisis.

Currently 'there is a lot of liquidity in the system, things are looking better over the last few months as there have been no hiccups in Dubai or the UAE,' said Lyndon Loos, head of forex trading for Middle East and North Africa at Standard Chartered.

Although UAE banks have been flush with cash in recent months, lending has been slow to pick up despite improved business sentiment after state-owned Dubai World reached a deal to restructure nearly $25 billion in September.

However, improved liquidity in the banking sector pushed UAE interbank offered rates to more than 14-month lows last week. The central bank called meetings with treasurers over the past weeks to encourage them to set lower rates.

'The recent reduction in Eibor reflects the improving liquidity situation within the UAE and we expect the 3-month Eibor to reduce further to around 1.75 per cent over the coming months,' said Stephen Jordan, general manager for liquidity management and interest rate products at the National Bank of Abu Dhabi.

The benchmark three-month offered rate fell to 2.016 per cent at the central bank's fixing on Monday, from 2.023 per cent on Sunday. It held above 2.3 per cent for several months last year following Dubai's debt woes.-Reuters