Is Saudi Arabia afraid of the dollar?

The once almighty greenback is losing supporters. How scared should we be?


Andrew Leonard
September 20, 2007 9:18PM (UTC)

Ambrose Evans-Pritchard, the international business editor of the U.K.'s conservative-leaning Daily Telegraph, sure knows how to move markets. In early August, he sent a shiver through bond investors when he reported that China was planning to "drop the bomb on the American dollar" in retaliation against trade pressure from the United States.

This week, on Wednesday, he sent similar shock waves through international currency markets with his speculation that a Saudi decision not to lower interest rates in "lockstep" with the U.S. signaled that the kingdom was planning to remove the "peg" that keeps the value of the Saudi riyal in a fixed relationship to the U.S. dollar. This possibility unnerved traders enough to send the already weak dollar to a historic low against the euro.

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I have noted previously that Evans-Pritchard's theories about Chinese intentions had some serious holes. His previous life as one of the more wacky anti-Clinton conspiracy theorists also does little to build confidence. And just as recently as a few days ago, Evans-Pritchard was spectacularly wrong when he suggested, in an article titled "Bernanke Will Prove Sterner Than Wall Street Thinks," that the Fed chairman might not be as quick to bail out the markets as investors were hoping.

One can even quibble with the key factual assertion in the first sentence of his analysis of the Saudi interest rate move.

Saudi Arabia has refused to cut interest rates in lockstep with the U.S. Federal Reserve for the first time, signaling 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.

However, a Bloomberg News story quoted an advisor to Saudi Arabia's King Abdullah as saying that there were no plans to drop the peg, and noted:

Saudi Arabia has not always followed the Fed's rate cuts, Monica Malik, chief economist at EFG-Hermes Holding said in a telephone interview from Dubai. It did not raise interest rates in 2006 along with the Fed to help revive its sagging stock market, she said.

None of this should be taken as an argument that the dollar isn't weak, and getting weaker, a trend that has incalculably huge consequences for the global economy. From an international perspective, the United States has been living on credit for years, with foreign investors acting as enablers through their insatiable appetite for U.S. Treasuries and other dollar-denominated investment vehicles.

There is a self-fulfilling prophecy aspect to the dollar's downward journey. A weak dollar pumps up the pressure on holders of dollar-denominated assets to diversify out of dollars, which only ends up making the dollar even more infirm. In that type of market, traders get increasingly nervous, to the point that even a sketchy piece of journalism by a historically unreliable narrator can make speculators all over the world push the sell button.

That's the scary part -- not what the Saudis might or might not do.

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Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Related Topics ------------------------------------------

Globalization How The World Works Middle East U.s. Economy




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