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The Fate of Currencies Pegged to the Dollar

Michel Morkos, Al-Hayat
The US dollar represents a major economic axis in many a country worldwide. Most of them have pegged their national currency to the dollar, believing the currency of a country such as the United States would remain sturdy seeing as it has one of the strongest economies in the world. So it came to be that the currencies that were pegged to the dollar were affected by its fluctuation, however the greenback became unstable. In the last two years, the dollar began its recession, dragging down with it these satellite currencies. They began to pay for this through a loss in their value that is, at the very least, equal to the losses incurred by the US currency. Sometimes the losses exceed those of the dollar depending on the currency’s strength or vulnerability in the face of the dollar or other major currencies.

Central Banks in these nations therefore keep an eye on the movement of the dollar but do not know what procedures to take in terms of the exchange value of their national currency. For political and economic reasons, very few nations have relinquished their peg to the US currency; they have forged links to a basket of major currencies, including the dollar, and imposed burdensome factors that are comprehensive. These factors differ and balance out according to the weight of each currency; so if the value of one or more of them recedes, this is recouped by the gains of other currencies that are not losing.

The effect of the collapse of the dollar is not only limited to the Euro, yen or sterling pound, when measuring the market value of each of them. Rather, the weakness of this currency and its activity includes over 65% of the world’s economies. It will bring to these economies the effects of inflation that eats away at the improved growth and consumes the value of the national currencies. From the beginning of 2006 until the present, the US dollar has lost about 20% of its value, 7% of that in 2007.
(20 September 2007)

Saudi riyal hits 21-year high

Dubai: Saudi Arabia’s dollar-pegged riyal surged to a 21-year high against the US currency last week after the world’s largest oil exporter said it would hold back from matching a US interest rate cut.

Speculation the kingdom may ditch its peg to the dollar has fuelled a frenzy of riyal buying which has pushed the currency’s spot rate to 3.7405 Saudi riyals, the highest since December 1986, according to Reuters data. Bids have touched 3.74 riyals per dollar, a breach of which should trigger central bank intervention.

Saudi Central Bank Governor Hamad Saud Al Sayyari said last week that 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 per cent.
(22 September 2007)

Fears of dollar collapse as Saudis take fright

Ambrose Evans-Pritchard, UK Telegraph
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
[LINKS at original] # China threatens ‘nuclear option’ of dollar sales
# Ambrose Evans-Pritchard: Brace yourself for the insolvency crunch
# The credit crisis in full

“This is a very dangerous situation for the dollar,” said Hans Redeker, currency chief at BNP Paribas.

“Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States,” he said.
(21 September 2007)

Dollar plunges on fears Saudis might drop peg

Lisa Twaronite & Polya Lesova, MarketWatch
Fueling bearish sentiment on the dollar, a report in the U.K.’s Daily Telegraph newspaper on Thursday pointed out that Saudi Arabia’s central bank didn’t take action in the wake of the Fed’s rate cut.

“Saudi Arabia has refused to cut interest rates in lockstep with the U.S. Federal Reserve for the first time, signaling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East,” the report said.

But Marc Chandler, currency strategist at Brown Brothers Harriman, said speculation that Saudi Arabia may abandon the peg between its riyal and the dollar and to reduce its holdings of dollars seems unfounded.

“While SAMA [Saudi Arabian monetary agency] may abandon the peg at some point, it is unlikely this will lead to a mass exodus from the U.S. bond markets, especially by central bank reserve managers,” Chandler said in a research note. “The largest reserve holders are not in the Middle East but in Asia and account, together with Russia, for over 63% of total reserve holdings.”
Referring to the currency peg, Chandler said that the governor of SAMA has said the bank held rates steady to fight inflation.”
(20 September 2007)
Contributor Jim writes:
The problem is rarely with the actual reality, but with the perception. If the Saudis hint, rumor or whathaveyou any indication that they’ll dump the dollar, that gets others elsewhere in a panic, causing a further slide. Then, it could become a self fulfilling prophecy as they follow the rest of the pack.

If the dollar goes off the crude peg, it’s quite probably toast, in a big way. Things will get very ugly from there.