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.