Fitch: Gulf states will not give up the peg to the dollar

The fall in oil prices and the rise in the dollar are pushing for Gulf currencies to be pegged to the US dollar, but the policy is unlikely to be canceled, Fitch Ratings said yesterday.

Oil exporters in the region, such as Saudi Arabia and the United Arab Emirates, peg their currencies to the dollar under long-standing arrangements that were reasonable when commodity prices were high and the dollar weak. “There is pressure to link the exchange rate in the region,” Fitch managing director Paul Gamble said. “But that will not happen. In fact, I do not expect any change in the exchange rate, “he said, adding that the cancellation would be a political decision and not an economic.

“Linking exchange rates is the most important factor and is really the only nominal pillar in these economies and it is supported by huge reserves,” he said during a press briefing.

Pressure to link the prices of oil producers to the Gulf is not limited. Kazakhstan abandoned its peg to the dollar in August, while Nigeria has already devalued its currency twice in the past year and may return.

Saudi Arabia, the world’s largest oil exporter, has pegged the riyal at 75.3 per dollar while the UAE has pegged the dirham at 6725.3 since 1997.

The contracts used to determine the direction of betting on the exchange rate show that Gulf currencies are under growing pressure. Dollar contracts against the one-year riyal peaked at a 12-year high in August, but remain well below the high levels recorded in early 1999 when oil prices were hovering near $ 10 a barrel.

The dollar rose to a two-week high against a basket of currencies as comments from Federal Reserve officials raised hopes of a rate hike later this year. The dollar has risen more than 2 per cent since falling  after the central bank’s decision to keep interest rates unchanged and reduce US growth prospects. However, some do not expect to raise interest rates until early next year, while around 50 percent bet on raising interest rates in October or December.

Gold rose last week after the Federal Reserve kept interest rates at its current low level, curbing the potential cost of holding the precious metal at the expense of other interest-bearing assets. But gold was unable to hold on to the gains after a Federal Reserve official confirmed that the rate hike had been delayed only.

“We are still in a position where investors are waiting to see when the leverage will take place,” said Simona Gambarini, analyst at Capital Economics. “There will be some fluctuation in precious metals until the Fed eventually raises interest rates.” Spot gold fell 9. 0 per cent at 41. 1123 dollars an ounce, while US gold futures for December delivery fell 80. 9 dollars to 1123 dollars.

Gold outperformed the precious metals most commonly used in the industry, where platinum fell in spot transactions 7. 2 per cent to 99. 939 dollars an ounce, while palladium fell 1. 2 per cent to 15. 598 dollars an ounce and silver fell 5. 2 per cent to 78. $ 14 per ounce.

Platinum fell to its lowest level since January at $ 934.