| 16 Aug 2008 |
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Saudi Arabia to keep $ peg as oil price slides
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JEDDAH - Saudi Arabia is likely to disregard an IMF recommendation and keep the riyal pegged to the dollar in view of the recovering US currency and declining oil prices. The International Monetary Fund had urged the Kingdom to consider alternative exchange rate regimes earlier this week.
On Friday, the falling euro was trading at $1.4712 as the markets took stock of data that showed the European economy braking sharply and US inflation running at its fastest pace in 17 years. The euro dropped below $1.50 last week for the first time in six months after the European Central Bank dashed expectations that it might continue raising interest rates amid fears of a European slowdown, and instead might cut interest rates by early next year to bolster economic growth.
The British pound hit a two-year low point against the dollar on Friday, slumping to $1.8512 - the lowest point since July 26, 2006. The pound has shed more than 12 percent in value since hitting a 26-year high of $2.1161 on Nov. 9.
Against the yen, the dollar rose to 110.28 from 109.66.
Riyadh has stuck to the dollar peg as the US currency fell over the past two years, pushing Saudi inflation to a 30-year high. Now, with the dollar recovering, the Kingdom has one reason less to change.
"I don't see anything in the IMF report that says we are wrong," said a senior Saudi government official familiar with policymakers' thinking. "We have seen the worst of the inflation without having to revalue our currencies, so there is economic sense in keeping the dollar peg for the moment," said the official, who requested anonymity.
John Sfakianakis, chief economist at SABB bank, supported the observation, saying that the Kingdom would most likely disregard the IMF's recommendation. "The Saudis will not drop the peg. It's just another recommendation ... the IMF note had a sort of disclaimer by mentioning the advantages of maintaining the peg," he noted.
Shahin Vallee, currency strategist at BNP-Paribas, added that the IMF's statement "was weak... It provided approval to GCC authorities that the current arrangement is beneficial and benefits outweigh costs, providing short-term support for the current regime: a smart political gesture from their part."
Oil, which is the primary revenue generator for the Kingdom, has also a bearish outlook.
OPEC on Friday revised its world oil demand growth forecast for 2008 down to 1.17 percent from 1.20 percent, citing the weak global economy. As a result, crude prices fell further.
London's Brent North Sea crude for October delivery dropped $1.21 to $112.47 a barrel. If the downward trend continues, it will cost OPEC about $79 billion in lost oil export revenue this year and almost $100 billion in 2009, according to the Energy Information Administration, the US government's top energy forecasting agency.
By Querubin J. Minas
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Community Comments (1)
“Saudi Arabia is likely to disregard an IMF recommendation and keep the riyal pegged to the dollar in view of the RECOVERING US CURRENCY and declining oil prices.”
Posted August 14, 2008
The Fed may be using its last available arrows.
http://www.goldonomic.com/
SNIP
Because of growing evidence indicating that there was a real risk the Dollar would break through the € 1.60 level there was unannounced intervention in support of the dollar. This could have involved Asian countries, but rumors are the intervention deal would more likely have been arranged with the Saudis during the recent Bush-Cheney visits. All that this would have required is sufficient buying commencing in mid-July to squeeze USD shorts and creating a momentum move on the upside.
UNSNIP
Ivo:
Does the Kingdom of Saudi Arabia think that this recovery is permanent?
http://jim.com/econ/chap01p1.html
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
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