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Peg debate back with a bang

|Arabian Post Special| The relentless plunge in oil price, which analysts are likening to the crash of 1990s, and its serious implications on spending plans are putting the focus back on the Gulf currencies’ dollar peg, including that of the UAE dirham.

Despite consistent backing for the dollar peg from all possible channels, including the monetary authorities, the debate is back with a bang. And the market is increasingly betting in favour of a change.

Although Saudi Arabia has vehemently defended the Saudi riyal’s peg to the dollar so far, the country’s monetary agency Sama will find it really tough to maintain status quo, as it is burning through its reserves to fund the $120 billion fiscal deficit. It is doubtful if the situation arising out of the price crash can be tackled with raising production alone, making currency readjustment a really strong option.

Dollar forward contracts for the Saudi riyal are rising as investors speculate that the continued slump in oil prices leaves the kingdom with no other option but to abandon the peg.

Forward contracts used to speculate on the Saudi Arabian riyal in the next 12 months jumped to a 13-year high in November, reflecting growing speculation the country will loosen or abandon its dollar peg and allow the currency to weaken for the first time in almost three decades.

Bets for a devaluation of the UAE’s dirham also surged in the past month to the highest in more than six years on September 10. Forward contracts for the UAE dirham are at the highest since 2009, as traders speculate the UAE will also be forced to readjust the exchange rate.

Bank of America-Merrill Lynch noted recently that although most analysts doubt the Saudis will let the riyal weaken anytime soon, that may change if oil prices don’t recover, handing the kingdom a choice between cutting crude production to boost prices or dropping the peg.