President Bush is committed to a strong dollar. He said so on Sunday at the 21-nation APEC conference in Chile. Yet within hours, the dollar had fallen to an all-time low against the euro and its weakest in four and a half years against the yen.
The problem that the money markets do not believe he has the will to cut the massive borrowing and deficits that are at the core of the dollar’s fall. They have been used to run the US economy for the past four years and, in the short term, they have worked; the economy is thriving. But at what cost? During the Bush first term, the dollar fell 30 percent against the euro. President Bush may now proclaim his intention to halve the deficit, but to the money markets, deeds speak louder than words: Only last week, he signed a new law raising borrowing to $800 billion. More damningly, the US Federal Reserve chief Alan Greenspan has hinted the dollar could fall even further. A weak dollar is good for the US economy. It helps keep jobs at home, reduces exports from economies whose currencies are not begged to it (which is why the Tokyo stock markets is so nervous) and boosts the growing tourist industry. But what about Saudi Arabia? The riyal is sinking alongside the dollar.
Last week the governor of Saudi Arabian Monetary Agency, Hamad Al-Sayyar, said that the Saudi currency is stable, despite the declining dollar. That is true. There is no stampede to get out of riyals, no crisis in the economy. But the slide hurts the Saudi economy — an economy fundamentally different to America’s and to those others with dollar-pegged currencies, such as China with its absolute need to export cheaply to the US.
Apart from oil, which will sell whatever currency it is denominated in and whatever the state of that currency, Saudi Arabia remains an import economy — heavily dependent on European and Japanese goods. To be an import economy with a currency that is now also at an all-time low against the euro and its weakest for over four years against the yen is bad news. The Europeans and Japanese are not going to hold down prices, even when denominated in dollars, simply for Saudi Arabia’s sake.
That is what SAMA is pinning its hopes on, but it is a false hope. Production costs for them are in yen, euros or pounds. For the Europeans to do so would be to accept a 15 percent cut in prices over the past year. They cannot afford it. The situation will get worse. There is speculation that the dollar will further drop against the euro in the next few months, to euro 1.50. It will not be surprising if last year’s suggestions in OPEC of linking oil to euros resurfaces. There is no sound monetary reason for a continued link. The riyal is strong and healthy. Unpegged, it would rise in value. That wifll not affect oil sales at all. On the other hand, Saudi Arabia would get more riyals for its dollars. More importantly, the import bill would fall, which should result in a drop in shop prices. That is in everyone’s interest. As it is, the continued link simply means that Saudi monetary policy is decided by George Bush and Alan Greenspan — and run in the interests of the US economy.
