Thursday, September 20, 2007

Fears of dollar collapse as Saudis take fright

by Ambrose Evans-Pritchard from The Telegraph

"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 ... As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy. The Fed's dramatic half point cut to 4.75% yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40. There is now a growing danger that global investors will start to shun the US bond markets ... For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4% and the M3 broad money supply is surging at 22%. The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3%, a 20-year high. In Qatar it has reached 13%.

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