riyal revaluation February 19, 2008Posted by agarvin in econ, international.
with all the (warranted) hubbub over mortgages and bond insurance and oil and obamarama and et cetera, there is at least one critical story that is being glossed over by the msm: the precarious state of currencies pegged to the dollar. there are a number of ‘smart money’ players making bets that these currencies will substantially appreciate in value relative to the dollar. pimco (the revered west-coast bond fund), for one, has been harping about this issue for quite some time – here is a piece of theirs on the revaluation of the chinese yuan.
in brief, the problem is that if you are say, saudi arabia, and 1) the currency you’re pegged to, the dollar, is falling precipitously, but 2) the fed is more worried about deflation and is thus slashing interest rates (which means that you probably need to cut rates as well), even while 3) you, saudi arabia, are experiencing the worst inflation you’ve seen in more than a decade, and 4) the demand for your currency is going up because peak oil is around the corner and you happen to account for 20% of the world’s oil exports — your currency peg is screwed.
so what do the saudi’s think about all this?
Prolonged discussions by the kingdom’s Shura consultative council at the weekend made it clear Riyadh has no plans to abandon the dollar link. Instead it is opting to use a massive petrodollar surplus to increase salaries and subsidies as a temporary measure to tackle inflation.
“During the Shura council discussions Al Assaf denied any plan to unlink the Saudi riyal from the US dollar on the grounds that 65 per cent of the world’s nations are tied to the dollar,” the report said. “Detachment has nothing to do with the rise in cost of living.”[…]The report added: “Sayyari said linking the Saudi riyal to the US dollar does not have a major impact on inflation, adding that all exports by Saudi Arabia and other Gulf states are priced in US dollars. He added most developing nations use the dollar as a peg to their currencies.”[…]He added: “Inflation has hit many countries. There are no magic solutions to this problem. Saudi Arabia is making efforts to ease the problem, particularly by increasing salaries by five per cent and subsidising consumer goods. These subsidies on essential goods, as well as indirect subsidies on many other commodities, will help us deal with the rising costs of living.”