Saudi Arabia could gradually appreciate its riyal in the event the dollar slides further against major currencies, says a report.

Riyadh-based Jadwa Investment said the kingdom is unlikely to drop its peg.

"Should the dollar continue to decline ... the central bank might begin a series of gradual adjustments to the exchange rate itself, as it did during the rise and fall of oil prices during the 1970s and early 1980s," Jadwa chief economist Brad Bourland wrote in the note received on Tuesday.

Bourland was formerly chief economist at Samba Financial Group, Saudi Arabia's second-largest lender by market value.

"The costs of altering the peg greatly outweigh the benefits," said Bourland, whose Jadwa provides advisory and investment services that comply with Islamic law.

The Saudi Arabian Monetary Agency cut a key interest rate by 50 basis points on Saturday to relieve pressure on the currency. Investors were betting on a 2.5 percent appreciation in the riyal in a year, according to forward rates at 0700 GMT.

The rate cut could ease pressure on the riyal in the short term, but would add to inflationary pressures, Bourland said. Inflation in Saudi Arabia hit 4.89 percent in September, its highest in at least a decade.

The riyal rose to a fresh 21-year high on Monday as investors bet the world's largest oil exporter would revalue its currency in concert with its Gulf Arab neighbours.

Pressure on the riyal has mounted since a source familiar with Saudi policy told Reuters on Nov. 16 that Riyadh could consider revaluing its currency for the first time since 1986, when it pegged the riyal to the dollar at 3.75.

The source said Saudi Arabia was committed to keeping its dollar peg.

The dollar slid to a fresh 2-1/2-year low against the yen on Monday, and has hit life-time lows against the euro and a basket of six major currencies this month. -Reuters