Saudi riyal weakens against key currencies

A surge in the dollar towards the end of 2008 boosted the Saudi riyal against most other major currencies before it was dragged down again by a weakening US currency at the end of 2009, official figures showed yesterday.

The riyal, which has been pegged to the US dollar for more than two decades, surged to one of its highest levels against the British pound, the euro and other key global currencies at the end of 2008 after plunging to one of its lowest rates early that year, the Saudi Arabian Monetary Agency (Sama) said in its quarterly report.

By the end of 2009, the riyal dipped again after sharp fluctuations through the year because of instability in the US dollar exchange rate.

From 7.4993 riyals at the end of 2007, the British pound tumbled to around 5.4668 riyals at the end of 2008 before rebounding to 6.0731 riyals at the end of 2009, said Sama, Saudi Arabia's central bank.

The euro dipped from around 5.5095 riyals at the end of 2007 to 5.2189 riyals at the end of 2008 before recovering to 5.4022 riyals at the end of 2009.

The Canadian dollar dived from about 3.8324 riyals at the end of 2007 to 3.0545 riyals at the end of 2008 but rebounded to 3.5760 riyals at the end of 2009. The Australian dollar slumped from around 3.2753 riyals to nearly 2.5980 riyals before surging again to about 3.3634 riyals in the same period.

Sama's figures showed there were sharp fluctuations in the riyal's rate through 2008 as the global fiscal crisis in mid-September that year reversed more than a year of a decline in the US dollar and a surge in other major currencies.

In the first half of 2008, the riyal was at one of its lowest levels against the British pound, the euro and other non-dollar currencies while it started to regain strength in the third quarter before soaring to one of its highest levels in the fourth quarter. During 2009, the riyal's exchange rate declined sharply in the second quarter before it gradually stabilized in the second half of the year.

Inflation in Saudi Arabia, the largest Arab economy and the world's dominant oil power, climbed to a record high of 9.9 per cent in 2008 before dipping to around five per cent in 2009. It is expected to slip to about 4.5 per cent this year.

"Inflation in the kingdom rose rapidly during 2008 despite early and forceful monetary tightening undertaken by Sama, including sharp increases in commercial bank reserve requirements and stepped-up Treasury bill issues," the Saudi American Bank Group said in a study.

"The ineffectiveness of these measures led many commentators to focus on the Saudi riyal's peg to the US dollar. Two particular issues were highlighted. First, the peg was generating imported inflation. The surge in inflation coincided with a sharp weakening of the US dollar against most major currencies, with its nominal value against a trade-weighted basket of currencies depreciating by 4.3 per cent in 2007 and a further 3.7 per cent in 2008, after just 1.5 per cent in 2006. This put upward pressure on Saudi import prices and hence, according to many observers, on Saudi retail prices."

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