Saudi Arabia set to keep riyal pegged to US dollar
RIYADH: Turning to interest rates in the Kingdom, the world's oil superpower, the study expected them to remain low throughout 2011.
Saudi Arabia is set to keep its currency the riyal pegged to the US dollar as it is expected to remain on the same track as in 2010 while inflation will remain relatively high, a key investment centre in the Gulf Kingdom said on Monday.
Although the Saudi Arabian Monetary Agency (SAMA), the country's central bank, might slightly raise interest rates towards the end of 2011, they will remain at historical low levels, the Riyadhbased Jadwa Investments said.
In a study sent to Emirates 24/7, Jadwa said SAMA could move rates up independently from the US because of an expected recovery in domestic bank credit following a sharp slowdown in 2009 and 2010.
"The riyal will remain pegged to the US dollar during 2011. We do not expect any serious discussion on breaking the peg or speculative pressure against the peg. Dollar movements are likely to be driven by the same themes as 2010; weakness in developed economies and strength in emerging economies," it said.
"As with 2010, we expect currency movements will be volatile and subject to swings in sentiment about the relative health of the economies of the US, Japan and Eurozone. These are likely to cancel each other out over the course of the year and therefore think the dollar will be relatively little changed during 2011."
It said that consensus forecasts point to a modest strengthening of the dollar against euro and weakening of the dollar against yen by the end of 2011. It added that a further depreciation of the dollar against emerging market cur- rencies is anticipated as the more robust performance of emerging economies will continue to draw in financial flows from developed economies, which will be exacerbated by creation of very cheap money through quantitative easing.
To manage these inflows, more countries are expected to resort to capital controls, which could raise international trade tensions, it said. According to the report, the main pressure point is currently the inflexibility of the Chinese yuan.
"There are unlikely to be formal US sanctions against China for currency manipulation, but pressure for swifter appreciation of the yuan will remain strong, not just from the US, but increasingly from emerging markets, as most emerging market currencies have appreciated strongly against the yuan…. faster yuan appreciation appears inevitable." -PB News