Saudi riyal falls in second quarter on weakening dollar

Saudi Arabia's riyal plunged against major world currencies in the second quarter of 2009 because of a weakening US dollar after a steady rise in the previous nine months, official figures showed yesterday.

Although it is backed by massive official reserves and foreign assets by the Saudi Arabian Monetary Agency (Sama), the riyal dipped against most other global currencies in the second quarter because of its peg to the US dollar.

The figures by Sama, the country's central bank, showed the average riyal exchange rate was sharply lower in the second quarter against the British sterling, the euro, the Japanese yen, the Swiss franc, the Canadian and Australian dollars and other key currencies. It also fell against the Special Drawing Rights (SDR), the unit used by the International Monetary Fund (IMF).

From an average SR5.3775 in the first quarter of 2009, the sterling jumped to SR6.210 in the second quarter, Sama said in its bulletin for April-June.

The decline followed a steady rise in the riyal's value against the British pound, which peaked at SR7.4689 in the second quarter of last year before slumping to an average SR6.7493 in the third quarter and as low as SR5.4668 in the last quarter. The pound continued to lose ground on the stronger dollar to reach SR5.3775 in the first quarter of 2009 before rebounding in the second quarter.

Sama report showed the euro also climbed to one of its highest levels against the riyal of about 5.9115 in the second quarter of 2008 before diving to 5.3636 in the third quarter and 5.2189 in the fourth quarter. It dipped to SR4.9905 in the first quarter of 2009, but climbed again to SR5.3003 in the second quarter.

The Swiss franc followed a similar pattern, peaking at SR3.6848 in the second quarter of last year then steadily declining to reach SR3.2941 in the first quarter of this year. It rebounded to about SR3.4713 in the second quarter.

The Japanese yen also rose to one of its highest levels against the Saudi currency in the second quarter of 2008 before dipping to 0.0382 in the first quarter of 2009. In the second quarter it edged up to 0.0391.

The report showed the SDR, after hitting its highest rate of 6.1209 against the riyal in the first quarter of 2008, dived to about 5.7047 in the fourth quarter. It fell further to 5.5622 in the first quarter of 2009 but rebounded to an average 5.7935 in the second quarter, according to Sama.

Like most other currencies, the riyal has been pegged to the US dollar at a fixed rate of 3.7500 for nearly three decades but speculation mounted in 2008 over a revaluation of the currency following a sharp rise in inflation rates.

Speculation, which attracted massive foreign funds seeking quick profits from a possible riyal appreciation, was also stoked by discussions within the Gulf countries about a new currency for the planned monetary union.

The persistent fluctuations in the US dollar have been cited as one of the key factors for the sharp increase in Saudi Arabia's inflation rate in 2008 along with high food prices, rents and strong domestic demand.

Inflation in the world's oil powerhouse climbed to an annual record high of 9.9 per cent last year but is projected to dip to nearly half that level in 2009 because of lower global commodity prices, waning local demand and better dollar rate.

Other Gulf oil producers also suffered from high inflation rates in 2008 mainly because of the dollar decline, which boosted their bill of imports from their main trading partners, including Japan and the European Union.

Despite the dollar's volatility against other major currencies, the IMF said last week it believed the riyal-dollar peg had contributed to economic and financial stability in Saudi Arabia, the largest Arab economy.

But the Washington-based IMF urged the kingdom and its possible partners in the monetary union, which is planned for 2010, to adopt what it described as a flexible currency regime to ensure the success of the project.


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