Saudi central bank chief reiterates commitment to US dollar peg

Governor Ahmed al-Kholifey says Gulf kingdom has 'sufficient tools' to support its fixed exchange rate policy
Saudi central bank chief reiterates commitment to US dollar peg
Saudi money, Saudi currency, Saudi economy, Saudi finance, GCC currencies
By Reuters
Fri 12 Aug 2016 05:59 PM

Saudi Arabia's central bank governor Ahmed al-Kholifey reiterated on Friday that the kingdom was committed to keeping the riyal pegged to the US dollar and that it had "sufficient tools" to support its fixed exchange rate policy.

After low oil prices pushed Saudi Arabia's state finances and external trade position deep into deficit, speculation that the kingdom might have to abandon the riyal peg peaked in January this year, before easing.

The central bank said it was issuing the statement "in response to what has been mentioned in some media about the riyal exchange rate policy", but did not elaborate.

"The governor of the Saudi Arabian Monetary Agency said the organisation reiterates its ongoing commitment to the riyal's exchange rate policy, currently at 3.75 against the US dollar," the central bank said in a statement on its website.

"Speculation that occurs from time to time about the riyal in the forwards market is inaccurate. The organisation has stressed on various occasions its continued commitment to the current riyal policy and has sufficient tools to support the exchange rate of the riyal.

"The fixed exchange rate policy has been followed for more than three decades and is an important policy supporting the kingdom's economy."

Foreign exchange prices in the onshore and offshore forwards markets suggest most of that pressure on the currency seen at the start of the year has faded; offshore forwards imply riyal depreciation of only just over 1 percent against the dollar in the next 12 months.

Speculation has eased partly because the central bank has warned banks against conducting derivatives trades that could pressure the riyal. Also, the central bank still had $562 billion of net foreign assets in June, which most economists think should be enough to support the riyal for at least a few more years under current economic circumstances.

Nevertheless, some banks continue to hedge against the risk of long-term riyal depreciation in the interest rate swaps market, where five-year riyal swaps hit 3.65 percent this week, their highest level since 2008.

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