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All eyes on Saudi as US cuts rates again
Gulf Arab currency markets are set to focus on the dollar-pegged Saudi Arabian riyal on Thursday after a US Federal Reserve rate cut raised pressure on the central bank of the world's biggest oil exporter to follow.
The Saudi central bank, concerned about quickening inflation at home, opted to ignore the last Fed cut on September 18, firing market speculation of an imminent revaluation that drove the riyal to a 21-year high.
The Saudi central bank usually follows US monetary policy to maintain the relative yield on the currency.
The Fed's 25-basis-point cut on Wednesday takes the gap between the returns investors get on the two currencies to it widest since 2002.
The Saudi central bank left its benchmark repurchase rate unchanged at 5.5% after the Fed dropped its main policy rate by 50 basis points on September 18. The latest cut took the overnight federal funds rate to 4.5%.
The average rate spread over the past 15 years has been 36 basis points, according to Deutsche Bank.
Bids on the riyal were at 3.7402 per dollar by 0430 GMT compared with the latest 21-year peak of 3.7290 on October 10. The central bank has kept the riyal stable at 3.75 to the dollar since June 1986.
The US interest rate cuts have divided the six Gulf Arab states that had agreed to keep their currencies pegged to the dollar until monetary union in 2010.
Oman and Bahrain joined Saudi Arabia in ignoring the September 18 Fed move, opting to ride out pressure on their currencies to appreciate, rather than stoke inflation. Annual inflation hit a 16-year high of 6.47% in Oman and a seven-year peak of 4.4% in Saudi Arabia in August.
Qatar and the UAE cut some key rates along with Kuwait, which broke ranks with its neighbours in May and dropped its peg to the dollar.
Inflation in the UAE hit a 19-year high of 9.3% in 2006 and price rises were 12.8 percent in Qatar in June. - Reuters
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