Gulf move quells dollar-peg talk

Simeon Kerr and Roula Khalaf
Financial Times
Friday November 2, 2007

Gulf states on Thursday cut some interest rates in a move that generally tracked the US Federal Reserve’s 25 basis points cut, undermining speculation that these oil-exporting economies may drop their dollar pegs.

Saudi Arabia, the largest economy in the region, reduced one of its interest rates by 25 basis points while raising banks’ reserve requirements to limit the growth of monetary supply in a bid to tame rising inflation. Five of the six Gulf Co-operation Council members peg their currencies to the US dollar and therefore usually follow US interest rate decisions. Kuwait in May abandoned its dollar peg, citing rising levels of inflation imported by the weakening dollar.

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The economic boom in the oil-rich Gulf, where oil prices have quadrupled during the past five years, should dictate higher interest rates, rather than the looser monetary policy being dished out to a US economy struggling to come to terms with the summer’s subprime mortgage crisis. “Increasing the Saudi reserve requirements is a way of tightening the monetary environment without raising rates,” said Simon Williams, an economist with HSBC in Dubai.

Speaking to reporters in London, Prince Saud al-Faisal, foreign minister, quelled speculation of any Saudi intention to drop the dollar peg. “Why would one do that?” he said, adding only half-jokingly that there “aren’t enough euros” around.

In September, Saudi Arabia ignored the Federal Reserve’s 50 basis-point cut, triggering speculative flows into the riyal that wrongly bet on a Saudi revaluation.

Saudi Arabia on Thursday also gave plans for a single Gulf currency a much-needed boost, predicting the majority of states in the Gulf Co-operation Council, including Riyadh, would join by the agreed date of 2010.

“Perhaps not collectively, but the majority will achieve it,” Prince Saud said, referring to the single currency.

Full article here.

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