Saturday, 22 September 2007

Fears of Dollar collapse

The Saudi government has refused to cut interest rates in line with the US Fed for the first time reports the Daily Telegraph. This could signal a break with the US Dollar currency peg setting the scene for a stampede out of the dollar in the Middle East. The Saudis have US$800bn in their future generation fund and the entire region has $3,500bn under management.

The US dollar currency peg is in danger of destabilising the Saudi economy through the inflationary threat of lower interest rates and a weaker currency. The Saudi central bank said it would take "appropriate measures" to halt huge capital inflows into the country.

The article notes that there is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries. This could leave America starved of the foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

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