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Thursday, September 20, 2007

An end to the dollar peg?

Saudi Arabia has for the first time refused to cut its interest rates in step with America, in a move which threatens its dollar peg, according to this article in the Telegraph.

Gulf countries including Qatar are currently tying their currencies to the dollar as part of plans to have a common Gulf currency. However, economic conditions in America are very different from economic conditions in the USA, and low interest rates have helped lead to high inflation.

Now in Qatar we are in the crazy position of having interest rates lower than inflation. Not a little bit lower, either - inflation is a shade under 13% while central bank rates are set at just 5.5%. So in Qatar it makes no sense to save, and lots of sense to borrow!

A further problem caused by the dollar peg is that the riyal is undervalued. That causes further inflationary pressures as non-dollar goods are now very expensive.

I can't imagine Saudi Arabia coming out of the dollar peg and Qatar not following. Assuming I am correct, that would hopefully mean lower inflation and a more sensible exchange rate - which would benefit expatriates sending money home.


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