Saudi riyal at seven-month high against US dollar.

Reuters
Published: September 21, 2007, 00:17

Dubai: Saudi Arabia's dollar-pegged riyal rose to a near seven-month high against the US currency yesterday after the world's largest oil exporter said it would hold back from matching a US interest rate cut.

Bids on the riyal were as low as 3.7478 per dollar, the currency's strongest since February 26.

The riyal traded at 3.7483 at 1150 GMT.

Saudi Central Bank Governor Hamad Saud Al Sayyari said on Wednesday the kingdom would hold back from cutting interest rates, even after the US Federal Reserve slashed its benchmark rate by 50 basis points to 4.75 per cent.

Dollar weakness intensified yesterday, partly on Sayyari's comments, falling to a fresh record low below $1.40 per euro.

"The main story today has been the possible break of the peg with the Saudi riyal," said Adam Cole, global head of FX currency strategy at Royal Bank of Canada.

"This could lead to lack of confidence on the dollar as its role as a reserve currency is being put into question, which is also supporting the euro."

Saudi Arabia has pegged to its currency to the dollar at the same value since 1986 and has rarely moved out of step with US interest rate movements.

"You are going to see pressure on the riyal to take advantage of the policy rate differential," said Caroline Grady, Middle East economist at Deutsche Bank.

Saudi Arabia's benchmark repurchase rate is 5.5 percent. The 75 basis-point spread with the U.S. federal funds rate compares with an average 36 basis-point spread during the last 15 years, Grady said.

The most it has ever been was 100 basis points, during the three months to February 2002.
Deutsche Bank expects the Fed will cut another 25 basis points at the October meeting.

http://archive.gulfnews.com/business/Banking_and_Finance/10155164.html