Dollar's fall amid interest rate cuts distresses Arab countries

Rules Review FX Union Date
As Fed Rate Cut Splits Gulf

By Souhail Karam
Reuters
via Yahoo News
Saturday October 27, 2007

http://in.news.yahoo.com/071027/137/6mhy3.html

JEDDAH, Saudi Arabia -- Gulf Arab rulers will decide in December whether to delay monetary union among six oil producers that are divided over how to respond if more U.S. interest rate cuts test currency pegs to the sliding dollar.

Gulf finance ministers and central bankers met in Saudi Arabia to review the 2010 deadline for creating a single currency in the world's top oil-exporting region -- a timetable all six say will be difficult if not impossible to meet.

With a widely-anticipated delay prompting investors to bet on the appreciation of dollar-pegged Gulf currencies, the six states agreed to keep foreign exchange policy unchanged, although each would steer its own course on interest rates.

"There is a margin for each state to follow monetary policies that correspond to its domestic conditions," Hamad Saud al-Sayyari, governor of the Saudi Arabian Monetary Agency, told reporters after the talks in the port city of Jeddah.

Oman's Central Bank Executive President Hamood Sangour al-Zadjali echoed the position, saying: "Each country has its own economic situation."

The International Monetary Fund said the Gulf needed monetary policy that was consistent with dollar pegs, after the six states broke ranks on their response to a U.S. interest rate cut last month, raising speculation about currency revaluations.

A dollar peg "requires following monetary policy that is coherent with that alternative, IMF Managing Director Rodrigo Rato told reporters after meeting Gulf Arab officials in Jeddah.

When the U.S. Federal Reserve cut rates on Sept. 18, Saudi Arabia, Oman, and Bahrain declined to follow, opting to ride out pressure on their currencies to appreciate rather than stoke inflation. Inflation hit a 16-year high of 6.47 percent in Oman and a seven-year peak of 4.4 percent Saudi Arabia in August.

Qatar and the United Arab Emirates cut some key rates along with Kuwait, the only Gulf Arab state that does not peg its currency to the dollar. Inflation in the UAE hit a 19-year high of 9.3 percent in 2006 and price rises were 12.8 percent in Qatar in June.

Kuwait's central bank dropped its dollar peg in May and started tracking the dinar's rate against a currency basket, saying dollar weakness was fuelling inflation by making some imports more expensive.

Investors drove the Saudi riyal to a 21-year high after the Fed cut, taking divergence on monetary policy as another sign that the deadline for creating a single currency was out of reach and that more revaluations would follow.

Analysts polled by Reuters last month were unanimous that the deadline would not be met. UAE Central Bank Governor Sultan Nasser al-Suweidi told a magazine this month that the timetable could slip beyond 2015.

"We did not discuss setting a new date," Sayyari said. Gulf Arab rulers would decide on the date at a meeting in Qatar in December "depending on the economic situation in the region." he said.

Monica Malik, senior economist at EFG-Hermes investment bank, said the rulers would also consider the outlook for the dollar, which hit life lows against a basket of six currencies this month, and has fallen 9 percent versus the euro this year.

"The U.S. dollar is structurally weak so it removes a lot of the advantages the peg had for Gulf states," she said.

Gulf currencies strengthened again on Friday, with the Qatari riyal gaining to its strongest since 2003, as investors bet central banks would let exchange rates appreciate.

"There was agreement that there is no need to change the current foreign exchange policy with consensus from all member states," Sayyari said.

Deutsche Bank economist Caroline Grady said Gulf states could not simultaneously maintain currency pegs, free capital accounts, and independent monetary policy.

"A delay would open up the scope for more moves in these currencies," said Grady, who expects the UAE to revalue its dirham this year.

Deutsche expects the Fed to cut rates by 25 basis points at its next meeting on Oct. 30-31, taking the gap between interest rates on the Saudi riyal and U.S. dollar to 1 percentage point for the first time since 2002, Grady said.

Saudi Arabia's benchmark repo rate is 5.5 percent and the Fed Funds rate stands at 4.75 percent.

The Fed is expected cut its benchmark this year either at the Oct. 30-31 meeting or in December, a Reuters poll of economists showed on Oct. 15.

The monetary union deadline began slipping when Oman opted last year not to join by 2010, saying it did not want to meet the spending curbs agreed with its neighbours. Kuwait blamed the delay for a decision to drop its peg to the dollar in May.

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No Change in Saudi Riyal's Peg to Dollar

By P.K. Abdul Ghafour and Fahd Al-Baqami
Arab News, Jeddah, Saudi Arabia
Sunday, October 28, 2007

http://www.arabnews.com/?page=6&section=0&article=102925&d=28&m=10&y=2007

JEDDAH, Saudi Arabia -- The Saudi riyal's peg to the US dollar will remain unchanged as GCC countries yesterday unanimously agreed to the continuation of the present exchange rate policy, Hamad Al-Sayari, governor of the Saudi Arabian Monetary Agency (SAMA), announced.

Speaking to reporters at the end of a joint meeting of GCC finance ministers and central bank governors, Sayari said GCC leaders would decide during their December summit whether they would be able to meet a 2010 deadline for monetary union.

"Our meeting discussed the issue of the Saudi riyal's peg to the American dollar and all members unanimously agreed to the continuation of the present exchange rate policy without making any change at present," the Saudi Press Agency quoted the SAMA chief as saying.

Sayari, who led the Saudi delegation at the meeting on behalf of Finance Minister Ibrahim Al-Assaf, said the GCC countries would regularly monitor the dollar's exchange rate to take appropriate decisions. The official said this when asked about the GCC's stance if the value of the dollar were to decline further.

Sayari's statement ended speculation that the riyal-dollar peg would be lifted as part of efforts to contain growing inflation in the Kingdom. Kuwait's central bank parted company with its GCC partners in May this year when it ended the dinar’s peg to the US dollar and linked it to a basket of currencies.

Investors were eagerly watching the Jeddah meeting of top financial and monetary policymakers in the six-member Gulf Cooperation Council that groups Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, and the United Arab Emirates.

Sayari said the ministers authorized technical committees to reassess the situation on the launch of the monetary union and submit their findings to the upcoming GCC summit in Doha.

"We have come across some difficulties in fixing the rates. The situation will be reassessed and the observations submitted to the Gulf summit," Sayari said when asked about the timeframe for the launch of the monetary union.

GCC Secretary-General Abdul Rahman Al-Attiyah said the meeting discussed how to overcome obstacles to its planned single currency launch and alternatives should the 2010 deadline be missed.

Proposals include postponing the deadline or launching the scheme in 2010 for those states that are ready and allowing others to join later.

The single currency plan has met technical, legislative and fiscal hurdles. Homud Al-Zidjali, Oman's central bank governor, announced in May that the sultanate would not join the scheme. "Our decision is not to participate in the Gulf monetary union ... because we do not want to restrict our monetary and fiscal policies at present," Zidjali said.

The International Monetary Fund (IMF) said Gulf monetary policy needed to be consistent with dollar pegs, after the six states broke ranks on their response to a US interest rate cut last month, raising speculation about currency revaluations.

"I think the relationship with the dollar is one alternative," IMF Managing Director Rodrigo Rato told reporters after meeting the GCC finance ministers and central bank governors. "That alternative requires following a monetary policy that is coherent with that alternative," he said.

Rato commended the role of Saudi Arabia and other GCC countries in stabilizing the world oil market by increasing production to meet growing demand.

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Syrian Pound 'Stabilizing'
After Dropping Dollar Peg

From Bloomberg News Service
via Khaleej Times, Dubai, UAE
Sunday, October 28, 2007

http://www.khaleejtimes.com/DisplayArticleNew.asp?xfile=data/business/20...

DUBAI -- Syrian central bank Governor Adib Mayaleh said the local currency is "stabilising" since the eastern Mediterranean state became the second Arab country to end its peg with the dollar.

"This is stabilising the currency the most in more than 20 months, despite major political pressures that we suffer from," Mayaleh said on Friday in a telephone interview from Damascus.

"As soon as we announced the de-peg, we started to see an improvement in the exchange rate."

Mayaleh said on June 4 Syria would follow Kuwait and end the Syrian pound's link to the dollar and peg it to a broader range of currencies to curb rising import costs and inflation. The currency was dragged lower against the euro by a 10 percent slide in the dollar last year. Kuwait switched to a currency basket in May.

"It certainly reduced the pressure on the currency," said Jon Harrison, an emerging-market currency strategist at Dresdner Kleinwort in London. "There is a lot of pressure on currencies to de-peg and we have seen Kuwait and Syria do it, so that adds to the pressure on the others."

The Syrian pound has strengthened 2.1 percent against the dollar since June and has weakened to 69.56 per euro yesterday from 66.17 on Jan. 6, according to central bank rates.

Record levels of inflation in Saudi Arabia, the United Arab Emirates, Qatar, and Oman have increased speculation that the countries will have to change their dollar pegs. The central bank governors of Saudi Arabia, the UAE, Qatar, Oman, and Bahrain have stated that they have no plans to revalue.

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