Revaluation of Saudi riyal during Eid speculated

Dubai: Speculation is rife that Saudi Arabia will revalue its currency, the riyal, during the Eid holidays, according to Standard Chartered Bank economist Steve Brice.

A move of 15 per cent has been mentioned, which "would be a huge shift of policy", he said, adding that a 5 per cent upward adjustment might be more plausible instead.

Questions arose last Thursday and Friday when the riyal/dollar rate moved below 3.75, ending at 3.7430. That is "historically very rare", Brice noted. No price was seen yesterday.

Word of potential revaluation came from both business and financial communities, and "from sources to which we attach some credibility".

"We don't really believe it's going to happen", Brice said, "but we're a bit nervous that it might."

He suggests that the speculations appear to have more credibility than those following the Kuwaiti dinar revaluation in May, when the intentions of Saudi policy were last seriously discussed.

"We attached a 1 per cent probability [of such a move] then, but 10 per cent now," he disclosed.

Because the corporate sector, which might otherwise restore the usual rate - by buying dollars for importing purposes - is on holiday this week, speculators might come in and keep the rate below 3.75, Brice indicated. More may be revealed when international markets re-open today.

Central bank response

"Absolutely key is the central bank response [to the speculation]," the note says. In the absence of a denial, such as in May, speculation would build.

Debate about the long-evity of the collective Gulf currency pegs has increased since soaring oil prices in the past two years have created boom conditions in the region, as well as substantial balance of payments surpluses.

The option of floating Gulf currencies would enable an independent monetary policy, specifically allowing higher interest rates, which might help cool the region's economies.

Analysts have urged the Gulf states therefore to reconsider the peg, although any such decision has been thought likely to be delayed until the planned date of monetary union in 2010.