DUBAI, 21 September 2007 — Saudi Arabia’s dollar-pegged riyal surged to a 21-year high against the US currency yesterday after the world’s largest oil exporter said it would hold back from matching a US interest rate cut.
Speculation that the Kingdom may ditch its peg to the dollar has fueled a frenzy of riyal buying which has pushed the currency’s spot rate to 3.7405, the highest since December 1986, according to Reuters data. Bids have touched 3.74 per dollar, a breach of which should trigger central bank intervention.
Saudi Central Bank Governor Hamad Saud Al-Sayyari told Reuters on Wednesday the Kingdom would hold back from cutting interest rates, even after the US Federal Reserve slashed its benchmark rate by 50 basis points to 4.75 percent.
After breaching $1.40 for the first time earlier yesterday, the euro went on to hit $1.4098 in late European trading, smashing previous record highs, as traders speculated about the chances of further cuts in US interest rates.
Sayyari has repeatedly ruled out revaluation, saying inflation at a 7-year high is mostly due to domestic factors such as rents rather than higher import costs.
Markets are now waiting to see what the central bank does. It did not comment on the riyal move yesterday.
Saudi inflation has accelerated due to the quadrupling in oil prices since the start of 2002. Money supply grew at its fastest pace in almost three years in July. But a Reuters poll of analysts last week found Saudi Arabia the least likely of Gulf states with a dollar peg to revalue. “When push comes to shove we would expect the Saudi authorities to protect the peg, but allow interest rates to fall,” Standard Chartered economist Steve Brice said.
Saudi Arabia has pegged to its currency to the dollar at the same value since 1986 and has rarely moved out of step with US interest rate movements. Saudi Arabia’s benchmark repo rate is 5.5 percent and the 75 basis-point spread with the US Fed funds rate creates a positive carry on a long riyal position. It compares with an average 36 basis-point spread in the last 15 years, Grady said.
“Most of the action we are seeing on the forex market, if not all of it, is by European banks,” said a treasury manager at a Riyadh-based lender, who declined to be identified. “They are speculating on a revaluation of the riyal, which is not really likely to happen.” If the spot breaches 3.74 and there is no intervention from the central bank, that will mean they will have allowed a revaluation,” said Koceila Maames, economist at Calyon in Paris.
