Speculation rife on riyal revaluation

The Saudi Arabian riyal hit a near seven-month peak against the US dollar on Thursday after the Saudi central bank governor said the oil producer would not match a US interest rate cut.

Bids on the riyal, which is pegged to the dollar, were at 3.7478 per dollar at 0915 GMT, its strongest level since February 26.

Saudi Arabia, the world's largest oil exporter, will hold back from matching the US Federal Reserve's 50-basis-point cut this week, central bank governor Hamad Saud Al-Sayyari told Reuters on Wednesday.

"After reviewing the situation of liquidity and the economic situation we feel there is no need for a change," he said.

Saudi Arabia and five of its neighbours tend to track US interest-rate changes to maintain the relative value of its currency.

Markets were speculating the decision could mean Saudi Arabia will follow neighbouring Kuwait and break its peg to the sliding US dollar.

But Standard Chartered Middle East economist Steve Brice said Saudi Arabia was unlikely to break the peg to the dollar.

"At the end of the day Saudi interest rates cannot be higher than their US dollar counterparts as this would merely encourage speculation," said Brice.

"When push comes to shove we would expect the Saudi authorities to protect the peg, but allow interest rates to fall," he said.

"I do not think his comments change the probability, but they change the market's perception as to the probability."

The UK's Daily Telegraph reported on Thursday the move "signalled that Saudi Arabia is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East".

Saudi Arabia was the least likely of five Gulf Arab states to revalue its currency or change its peg to the US dollar before the goal of monetary union was achieved, according to analysts polled by Reuters last week.

Earlier this month Sayyari said Gulf Arab finance ministers and central bank governors will meet in October to discuss plans for a single currency that has become difficult to achieve by a 2010 deadline.

In May Kuwait broke ranks with Saudi Arabia, the UAE, Qatar, Oman and Bahrain by dropping its dollar peg as the US currency's slide was fuelling inflation.

Saudi inflation surged to a seven-year high in July of 3.83% on higher food prices and rising rents.

Inflation could rise to 4% this year, Sayyari said earlier this month, which would be the highest in 13 years.

This is not the first time Saudi Arabia has moved out of step with the Fed.

In early 2006, the kingdom held back from raising rates when its stock market slumped.