RIYADH (Reuters) – Saudi Arabia could consider revaluing the riyal with other Gulf oil producers, but has no plans to drop its peg to the tumbling dollar to track a currency basket, a source familiar with Saudi currency policy said.
The kingdom set its exchange rate in 1986 and has never said it is reviewing that policy, even though the dollar’s slide has forced Gulf neighbours and other OPEC oil exporters to question the wisdom of tying their economies to the U.S. currency.
Any revaluation by the world’s biggest oil exporter would be “very small” and designed to keep plans for Gulf monetary union alive, the source said, communicating the Saudi response to growing market expectations of a Gulf exchange-rate shift.
The United Arab Emirates, the second-largest Arab economy after Saudi Arabia, ratcheted up those expectations this week by saying it could unshackle its dirham from the dollar and track a currency basket including the euro as Kuwait did this year.
The UAE would only act with Saudi Arabia and other neighbours preparing for monetary union as early as 2010, UAE Central Bank governor Sultan Nasser al-Suweidi told Reuters on Thursday.
“We were taken by surprise by his statement,” the source told Reuters in the Saudi capital, Riyadh, on Friday, declining to be identified. “His statements contradict everything that has been discussed at the regional level.”
“Saudi Arabia will definitely not shift to a basket of currencies,” the source said. “We have never discussed dropping the peg to the dollar, whether at meetings of finance ministers or central bank governors.”
An end to the Saudi peg could weigh on the dollar, which hit a 26-year low against sterling, an 18-month trough against the yen and a record low against the euro this month on concerns about slowing U.S economic growth after a mortgage crisis.
In September, the U.S. currency hit a low of $1.40 against the euro on speculation Saudi Arabia would scrap its peg, potentially reducing demand for U.S. assets in a region with a $1 trillion in surplus funds.
The Saudi government could consider revaluing the currency, which the central bank has kept stable at 3.75 to the dollar since June 1986, the source said.
“We will take time to revalue. If it were to happen, it will be very small, to realign the Gulf currencies with each other,” the source said.
“But it’s not going to happen in the short-term. The kingdom will not take unilateral steps towards revaluation,” the source added, declining to elaborate on the size or timeframe of any shift.
The riyal hit a 21-year high of 3.7148 per dollar on Friday after Suweidi’s remarks.
Qatar, Bahrain, the United Arab Emirates and Saudi Arabia could shift together to a common fixed exchange rate against the dollar to “facilitate monetary union”, the source said.
The four countries had agreed with Oman and Kuwait to keep their currencies pegged to the dollar until monetary union in 2010.
Oman opted last year not to meet the deadline and Kuwait threw the project into disarray in May when it started tracking the dinar against a currency basket, saying the dollar’s weakness was making some imports more expensive.
Apart from driving up import costs, dollar pegs force central banks to track U.S. monetary policy to maintain the relative value of their currencies at a time when the Federal Reserve is cutting rates and Gulf inflation is at decade highs.
Suweidi said the UAE was under growing social and economic pressure to drop its peg and that the rulers of the six states could agree to change policy at any time. A regional summit is scheduled for December.
“The leaders will not discuss dropping the peg to the dollar,” the source said of the summit.
Pressure for exchange rate reform is growing.
In the UAE, where foreigners make up about 80 percent of the population, migrant construction workers downed tools and rioted this month to demand a pay hike to make up for savings lost to the dollar’s slide.
The Saudi king’s advisors have called for a national wage hike to compensate for inflation at a 10-year high of 4.98 percent, Qatar is considering rules to check inflation and Oman, like the UAE, has imposed caps on rent rises.
And with oil priced in dollars, the U.S currency’s slide is eroding export revenues – a concern raised by Venezuela and Iran at a meeting of the Organization of the Petroleum Exporting Countries in Riyadh on Friday.