Saudi king to block riyal revaluation

STEPPING IN: King Abdullah (pictured) will not allow the riyal to be revaluated against the ailing US dollar, analysts have said. (Getty Images)

Saudi Arabia's monarchy is set to reject any call from the influential Shura advisory body to revalue the dollar-pegged riyal, as the economic case for reform takes second place to a political pledge to support the dollar.

Bids on Saudi riyal one-year forwards rose to their highest in more than a month after Shura Council member Waleed Arab Hachem told newswire Reuters on Tuesday the body that advises King Abdallah was set to recommend a revaluation to fight inflation.

Hachem said he would call for a 20-percent revaluation of the riyal, which has been fixed at 3.75 to the dollar since 1986. The greenback hit a fresh record low against the euro on Tuesday, breaching $1.60 versus the European currency.

But analysts say Saudi Arabia, the world's top oil exporter and a staunch US ally, is reluctant to deal any further blow to a dollar already battered by concerns over the health of the American economy as political tensions over nearby Iran mount.

"The decision to revalue now - and add further losses to the US dollar - does not fit with recent US official efforts to garner international support," ING said in a note to clients.

During a visit to the Gulf in early June, US Treasury Secretary Henry Paulson defended the dollar's position as the world's reserve currency, and regional governments preparing for monetary union were listening.

"Though this recommendation will likely reactivate a wave of speculative Saudi riyal forward buying in the weeks ahead, we doubt the Saudi executive will allow a revaluation of the riyal in the nearer term," ING said.

Analysts have said Saudi leadership regards Washington's support for its legitimacy as important enough to trump the economic arguments in favour of currency reform.

But domestic demands to curb inflation that hit a more than 30-year high of 10.5 percent in April are only going to grow in the largest Arab economy, home to 25 million people.

"Inflation has not stopped and the riyal keeps declining without justification," Hachem said on Tuesday, outlining his argument to the Shura Council which underscored growing popular discontent surrounding the currency regime.

The weak dollar has already sparked riots of expatriate workers in the United Arab Emirates and Bahrain.

"The peg is not sacred, it should be revalued," Hachem said.

But Saudi Arabia's leadership has not been swayed by the dollar's repeated plunge to record troughs against the euro this year and last, or the US Federal Reserve's seven interest rate cuts since September.

Saudi Arabia is the key political force behind getting a troubled Gulf single currency plan back on track to prevent any of its neighbours from following Kuwait's 2007 lead and severing their dollar pegs alone.

Gulf policymakers managed to quash bets for Gulf currency reform, which peaked in the first quarter, by giving a renewed push toward completing a single currency project at a key central bank meeting in April.

They will not want to risk renewing a wave of speculative buying of their currencies.

"Policymakers in Saudi Arabia are not persuaded by the arguments for change. It is unlikely that any reform will happen in the near term," said HSBC regional economist Simon Williams.

"They are sceptical that currency appreciation will have an impact on inflation and are worried about the effect it would have on their non-oil sector."

Still, imports are getting expensive in the Gulf, where states rely heavily on European sources. Former US Federal Reserve chairman Alan Greenspan said in February inflation would fall substantially if the oil producers dropped their pegs.

Kuwait cited imported inflation as the reason for severing its dinar's link to the dollar in May 2007. It now tracks a currency basket comprised mainly of the greenback and has allowed its currency to rise about 9 percent - much less than the level of the dollar's decline versus the euro.

Dollar pegs were intended to stay intact until monetary union, but with the initial target date of 2010 looking impossible, the Gulf cannot afford rifts in currency rhetoric until they are ready to move together.

Decisionmakers from the Saudi central bank governor to the UAE prime minister have backed their pegs and vowed not to revalue, even as domestic pressure mounts.

In addition to the Shura Council, which is debating a revaluation for a second time this year, a personal adviser to the emir of Qatar has also recommended dropping the peg.

Abu Dhabi's Department of Planning and Economy called on Gulf states to consider a currency basket in a report this month. In all three cases, recommendations are not binding on rulers and central banks have only limited say.

Any regional currency reform will most likely happen on a multilateral basis, with emphasis in the meantime being given to rallying support for the dollar, analysts said.

"We think that in the very short term, there is limited chance of a revaluation," Shahin Vallee, a currency strategist at BNP Paribas, said of the Shura Council's discussion.

"There needs to be a stabilisation in the US dollar and a real high-level political discussion within the Gulf," he said. (Reuters)

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