WRAPUP 2-Saudi inflation hits 27-yr high as Gulf tracks Fed

(Adds Kuwait, Qatar currency reaction, Saudi position)

By John Irish and Ola Galal

DUBAI, March 23 (Reuters) - Inflation in Saudi Arabia surged to a 27-year high of 8.7 percent in February as the world's largest oil exporter and its Gulf Arab neighbours lowered interest rates to defend pegs to a tumbling U.S. dollar.

Saudi Arabia matched the U.S. Federal Reserve's 75 basis point cut last week with the United Arab Emirates and Bahrain. Qatar, where inflation is at 13.74 percent, followed on Sunday.

Qatar also tightened lending curbs on banks for a third time since December, signalling the growing dilemma for Gulf governments, torn between averting currency appreciation and containing soaring prices.

Unable to use monetary policy, Saudi Arabia has also resorted to lending curbs and measures such as subsidies and wage hikes to cushion the impact of surging inflation, leading markets to bet that it will allow the riyal to rise against the dollar.

At 1307 GMT, investors in forward contracts were expecting the riyal to gain 2.08 percent in a year to 3.672 per dollar.

"If you have global price rises and the currency is weaker by the day then there is a strong case for currency reform," said Marios Maratheftis, regional head of research at Standard Chartered Bank in Dubai.

The dollar peg is fuelling inflation by making some imports more expensive as the U.S. currency sinks on global markets. It also forces the Saudi central bank to follow the Fed as it cuts rates to stave off recession.