Sunday, January 13, 2008

More On Saudi Dollar Peg

Financial Times reports that Saudi Arabia faces soaring inflation and that this is widely blamed on Saudi Arabia's pegging its currency, the riyal to the U.S. dollar. Something which has put strong upward pressure on inflation as the weak currency raises import prices and as the Saudi central bank is forced to copy the Federal Reserve's inflationary policies.

Yet the Saudi government resists calls to revalue the riyal or drop the dollar peg, largely for political reasons-a decision that will continue to harm the Saudi economy as the Fed cuts rates further and the dollar continues to fall.

I find it ironic by the way that the U.S. government is apparently pressuring the Saudis to keep the dollar peg, even as they are pressuring China to do the opposite. The U.S. government seems to have no consistent policy when it comes to pegs. Either they actively oppose it as in the case of China, or they are indifferent to it as in the case of Hong Kong or they actively support it as in the case of Saudi Arabia.


Anonymous Flavian said...

I think the best solution would be for the Fed to lower it's lending rates to 0% or less. After that the inflationists have no reason for further complaints about deflationary monetary policies and the dollar can be replaced by gold through a natural market process.

1:02 AM  

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