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Emerging Markets

Saudi central bank chief tackles dollar fears

Affirms dollar peg, pledges flexibility

Saudi central bank governor Muhammed Al Jasser has reaffirmed the Kingdom’s commitment to the US dollar, amid growing fears that the world’s reserve currency is headed for a sharp decline.

In an exclusive interview with Emerging Markets, Al Jasser said he saw “no need” to abandon the dollar peg that had “served our interests well”.

“One hundred per cent of our exports are in the dollar, more than 70% of our imports are denominated in the dollar. Why would you want to give up such a natural hedge without a better alternative? Right now I don’t see any.”

Al Jasser pointed out that a dollar peg provided “a reasonable anchor of transparency and clarity” on the value of goods and services. Following the demise of the gold standard there are no longer any “absolute values of currencies and the relative values of currencies are in flux,” he noted.

His comments came amid mounting concerns about the dollar’s decline. World Bank chief Robert Zoellick recently said that, without substantial rebalancing, the greenback’s days as as the pre-eminent reserve currency are numbered, while Mohammed El Erian, co-chief executive of Pimco, asked by Emerging Markets recently whether the dollar is in structural or cyclical decline, said: “Both.”

Al Jasser added that a proposed Gulf monetary union – which he expects will be launched by next January – would take a pragmatic stance towards exchange rates in fixing the value of its proposed currency.

Saudi Arabia, like all Gulf Cooperative Council (GCC) states bar Kuwait, pegs its currency to the dollar, forcing the central bank to track the US Federal Reserve’s monetary policy. At present, low US interest rates suit Gulf states as they look to spur economic growth – but as their economies recover, a fixed exchange rate risks stoking inflation.

Al Jasser pointed out that the Saudi Arabian Monetary Authority was “very pragmatic when it comes to this issue,” leaving the door open to a future shift if economic conditions warrant it.

“There are no emotional or political attachments to any system, including the dollar. It has just happened to serve our interest well at this stage.

“There are no fetishes or illusions about what system is perfect. It’s not like we adopt a system and go to sleep,” he said. “We worry about all of these things, we analyse, and take action when necessary.”

Observers say that if the GCC decides to establish a new currency as planned by 2010, Saudi Arabia and other states may have to revalue their currencies.

Al Jasser said that a monetary union deal between Gulf States would be ratified within months. “I’m optimistic by the end of this year or by the beginning of January 2010 that it will be ratified and the monetary council will be formed.”

Oman and the United Arab Emirates have withdrawn from the plan, which envisages one central bank for the region and greater trade and finance cooperation. Kuwait, Saudi Arabia, Bahrain and Qatar are still committed to the project. “I’m very optimistic that the other two will come back when the time is right,” said Al Jasser.

Soaring inflation last year led to widespread calls for Gulf states to sever ties to the greenback. The dollar peg was blamed for driving up credit growth due to low interest rates, as well as for pushing up imported inflation as the dollar fell against global currencies.

Al Jasser said that there was no reason “yet” to change the central bank’s foreign exchange reserve management strategy, but that the monetary authority must keep watch for emerging risks. “It’s dynamic. So long as [the strategy] does not compromise” the central bank’s basic three basic elements – maintaining liquid reserves, held in secure assets, and seeking risk returns – “we will manage proactively.”

The greenback tumbled last Friday – after employers cut more jobs than expected last month, driving unemployment up to a fresh 26-year high – despite having already weakened more than 10% since April.

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