Posted on 09/21/2007 6:34:49 AM PDT by hubbubhubbub
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom 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.
Ben Bernanke has placed the dollar in a dangerous situation, say analysts
"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.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
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.
advertisementThe Fed's dramatic half point cut to 4.75pc 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. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.
"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said.
Mr Redeker said the biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade", causing massive flows from the US back to Japan.
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, the driving the property market into even deeper crisis.
"If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems," he said.
The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.
Former Fed chief Alan Greenspan said this week that house prices may fall by "double digits" as the subprime crisis bites harder, prompting households to cut back sharply on spending.
For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4pc and the M3 broad money supply is surging at 22pc.
The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar it has reached 13pc.
Kuwait became the first of the oil sheikhdoms to break its dollar peg in May, a move that has begun to rein in rampant money supply growth.
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Iran started this earlier in the year by demanding Japan pay for their oil in yen, which the Nipponese were very happy to do.
Saudi will not make a move with the dollar for the sake of W and the sale of some 20 billion in military equipment. Once the sale is over and the ink is dry, well...
Get ready for the peso to catch up to the dollar.
This same story has been posted several times on FR over the last several days.
I travel to Asia a lot and the dollar has taken a 25% hit here in the last few years.
Yes, where do they think the world economy gets it’s fuel, from the richest nation.
I live in Thailand and import goods from the US. The strengthening of the Thai Baht has led to some unexpected extra profits. No complaints here.
Was just in Bangkok last week. You are corret the baht has increased along with the most of all the asian currency. Will be in Saigon in Oct and the Phillipines in Dec.
Glad someone is profiting.
If we could just kick China free we could really turn things around here.
Like I said, the dollar collapses, the worlds economy is in the sh*tter. Economics 101
I know what you meant. What matters is how it affects me, us, etc. In this case, as an individual, it is f-ing with my buying power in Asia and in Europe.
Yes, that is the downside to this. I would say buy American but since we don’t make anything anymore...
This must be true since it has been posted several times.
I would say buy American but since we don’t make anything anymore...
Sad and true but still LOL.
“Saudi will not make a move with the dollar for the sake of W and the sale of some 20 billion in military equipment. Once the sale is over and the ink is dry, well...”
Sorry, the Saudis nor the Gulf States would do it; they are not about to watch their own dollar-denominated-investments (much much bigger than their T-bills) made less valuable by deliberately undermining the currency those investments are denominated in.
If they do ANY such move, it will be very gradual, and the Feds reaction (money supply) will be corresondingly, to mute the affects for everyones benefit.
I hate to watch my retirement funds slowly become worthless compared to other world currencies.
From The Economist last week (http://www.economist.com/finance/displaystory.cfm?story_id=9804394):
“Another argument against a sudden crash is that the dollar is already quite cheap. In real effective terms, it has slowly fallen by some 20% since its recent peak in 2002. That decline is already helping to shrink America’s external deficit. Monthly trade figures for July showed exports growing at a 14% annual rate, whereas imports grew by 5%. This differential, notes Jim O’Neill of Goldman Sachs, is the biggest in years. Add in the probability of sharply slower domestic demand in America, and the current-account deficit could shrink a fair bit over the coming months. A smaller need for foreign funds would itself put a floor under the dollar.
All told, the doom-mongers’ script may play out in reverse. Instead of a financial crisis prompting a dollar crash, it may accelerate the unwinding of the imbalances that had the worrywarts so unnerved in the first place.”
Sorry but it did have a 9/21 date on it and I did a search.
I’ve never heard anyone so in love with their own imagined facts than you.
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