LONDON (Reuters) - Qatar has asked U.S. regulators to investigate the U.S. subsidiary of the largest bank in the United Arab Emirates, accusing it of “bogus” foreign exchange deals designed to harm its economy as part of a blockade by Gulf neighbors.

FILE PHOTO: Cars drive past the building of Qatar Central Bank in Doha, Qatar, June 6, 2017. REUTERS/Naseem Zeitoon/File Photo

The Central Bank of Qatar's law firm has written a letter to the U.S. Treasury asking it to investigate NBAD Americas, the U.S. subsidiary of First Abu Dhabi Bank (FAB) FAB.AD, which is majority state-owned.

In a second letter, the lawyers - Paul, Weiss, Rifkind, Wharton & Garrison - asked the U.S. Commodity Futures Trading Commission (CFTC) to investigate possible manipulation of Qatar’s currency, the riyal.

The request for an investigation deepens the diplomatic crisis that erupted in June when Saudi Arabia, Egypt, the United Arab Emirates (UAE) and Bahrain imposed an economic boycott on Qatar, accusing it of supporting Islamist militants and Iran.

“We believe NBAD has participated in an extraordinary and unlawful scheme to wage financial warfare against Qatar, including through the manipulation of Qatari currency and securities markets,” said the letter to the U.S. Treasury dated Feb. 26, which has been seen by Reuters.

“These actions should be halted immediately, and we ask that you investigate whether NBAD has directly or indirectly supported the manipulation of Qatar’s markets, including through NBAD America’s dollar-clearing or correspondent banking services in the United States,” the letter said.

FAB, which was created from the merger of First Gulf Bank and National Bank of Abu Dhabi last year, denied it had tried to manipulate the riyal.

“FAB conducts its business in accordance with the highest professional standards and complies with the laws and regulations of the jurisdictions in which it operates. FAB categorically refutes these rumors,” it said in a statement on Monday.

“FAB maintains strong working relationships with regulators across the globe and continually engages in constructive dialogue to ensure full compliance with the latest legal and regulatory requirements,” it said.

The UAE government did not immediately respond to a request for comment.

A Qatari government spokesman confirmed the letters had been sent to U.S. regulators but declined to comment on their content. New York-based law firm Paul, Weiss declined to comment.

The U.S. Treasury and CFTC did not immediately respond to requests for comment.

DIPLOMATIC PUSH

Qatar’s central bank said in December it had launched an investigation into possible manipulation of its markets by the countries that had imposed the economic blockade.

Qatar, a small Gulf state and major gas exporter, denies the allegations that it has financed terrorism and says the blockade is an attempt to punish Doha for independent policies.

The UAE and Saudi Arabia have refused to soften their demands - which include Qatar cutting ties with Iran and shutting down state-funded broadcaster Al Jazeera.

Qatar, which is also home to the largest U.S. military base in the region, has repeatedly reached out to Washington to mediate in the crisis but the attempts have failed so far.

Last week, U.S. President Donald Trump, who has previously accused Qatar of sponsoring terrorism, sacked U.S. Secretary of State Rex Tillerson, who had publicly defended Qatar and pressured Trump to moderate his stance.

Tillerson’s sacking came ahead of a new diplomatic push to help mediate the dispute among America’s Gulf allies.

The United States is due to host a Gulf Cooperation Council summit later this year and before that Saudi Crown Prince Mohammed bin Salman, Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed al Nahyan and Qatari Emir Sheikh Tamim bin Hamad al Thani are all due in Washington for separate state visits.

‘BOGUS QUOTES’

The Qatari central bank has previously accused unnamed banks of trying to manipulate the riyal by trading it between themselves offshore at artificially weak levels - to create an illusion Qatar’s economy was crumbling.

The riyal has been pegged to the U.S. dollar at a rate of 3.64 for more than a decade, but in the initial months of the boycott it traded as low as 3.8950 offshore. QAR=D1

In the letter to the U.S. Treasury, Qatar’s lawyers said they suspected NBAD was driving the riyal lower during illiquid periods, such as Islam’s Eid al-Adha holidays last year, “reinforcing the manufactured narrative that Qatar’s currency was increasingly volatile and its economy was too unstable for investment”.

“NBAD’s quotes - and those of other banks involved in the manipulation - were likely all bogus,” the letter said without naming the banks and referring to foreign exchange quotes posted by NBAD.

“There is evidence that at the same time NBAD was providing quotes with great frequency and at rates lower than the official rate of 3.64, its traders were unwilling to actually transact at those prices,” the letter said.

It cited one example on Nov. 22, 2017: when a counterparty reached out to NBAD to execute a deal, it was told by a representative of NBAD that it had no riyal to trade.

FAB declined to comment when asked about the specific allegation.

The letter did not name the counterparty but said the central bank’s lawyers were ready to provide regulators with a recorded chat between the two sides, on a confidential basis. It said NBAD stopped quoting the riyal in December after Qatar vowed to investigate.

The central bank also pledged on Nov. 23 to satisfy any market demand for dollars and the riyal has since rebounded in offshore transactions to trade close to its peg.

Many bankers in the region say that with more than $300 billion in central bank reserves and sovereign wealth fund assets, Qatar has more than enough financial firepower to block any attack on its currency.