[Texgreen] Saudis may dump dollars, leading to collapse

[Roger Baker]

...As a close ally of the US, Riyadh has so far tried to stick to the =20=

peg, but the link is now destabilising its own economy.... The =20
Federal Reserve, however, clearly calculates the risk of a sudden =20
downturn is now so great that the it outweighs dangers of a dollar =20
slide...

In other words, crank up the printing presses and maybe we can =20
inflate our way out of this mess. -- Roger

                    =20
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<http://www.telegraph.co.uk/money/main.jhtml?xml=3D/money/2007/09/19/=20
bcnsaudi119.xml>

Fears of dollar collapse as Saudis take fright

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:39am BST 20/09/2007

Saudi Arabia has refused to cut interest rates in lockstep with the =20
US Federal Reserve for the first time, signalling that the oil-rich =20
Gulf kingdom is preparing to break the dollar currency peg in a move =20
that risks setting off a stampede out of the dollar across the Middle =20=

East.
# China threatens 'nuclear option' of dollar sales

Fears of dollar collapse as Saudis take fright
Ben Bernanke has placed the dollar in a dangerous situation, say =20
analysts

"This is a very dangerous situation for the dollar," said Hans =20
Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (=A3400bn) in their future generation fund, =20
and the entire region has $3,500bn under management. They face an =20
inflationary threat and do not want to import an interest rate policy =20=

set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate =20
measures" to halt huge capital inflows into the country, but analysts =20=

say this policy is unsustainable and will inevitably lead to the =20
collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the =20
peg, but the link is now destabilising its own economy.

The Fed's dramatic half point cut to 4.75pc yesterday has already =20
caused a plunge in the world dollar index to a fifteen year low, =20
touching with weakest level ever against the mighty euro at just =20
under $1.40.

There is now a growing danger that global investors will start to =20
shun the US bond markets. The latest US government data on foreign =20
holdings released this week show a collapse in purchases of US bonds =20
from $97bn to just $19bn in July, with outright net sales of US =20
Treasuries.

The danger is that this could now accelerate as the yield gap between =20=

the United States and the rest of the world narrows rapidly, leaving =20
America starved of foreign capital flows needed to cover its current =20
account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

Mr Redeker said foreign investors have been gradually pulling out of =20
the long-term US debt markets, leaving the dollar dependent on short-=20
term funding. Foreigners have funded 25pc to 30pc of America's credit =20=

and short-term paper markets over the last two years.

"They were willing to provide the money when rates were paying =20
nicely, but why bear the risk in these dramatically changed =20
circumstances? We think that a fall in dollar to $1.50 against the =20
euro is not out of the question at all by the first quarter of 2008," =20=

he said.

"This is nothing like the situation in 1998 when the crisis was in =20
Asia, but the US was booming. This time the US itself is the =20
problem," he said.

Mr Redeker said the biggest danger for the dollar is that falling US =20
rates will at some point trigger a reversal yen "carry trade", =20
causing massive flows from the US back to Japan.

Jim Rogers, the commodity king and former partner of George Soros, =20
said the Federal Reserve was playing with fire by cutting rates so =20
aggressively at a time when the dollar was already under pressure.

The risk is that flight from US bonds could push up the long-term =20
yields that form the base price of credit for most mortgages, the =20
driving the property market into even deeper crisis.

"If Ben Bernanke starts running those printing presses even faster =20
than he's already doing, we are going to have a serious recession. =20
The dollar's going to collapse, the bond market's going to collapse. =20
There's going to be a lot of problems," he said.

The Federal Reserve, however, clearly calculates the risk of a sudden =20=

downturn is now so great that the it outweighs dangers of a dollar =20
slide.

Former Fed chief Alan Greenspan said this week that house prices may =20
fall by "double digits" as the subprime crisis bites harder, =20
prompting households to cut back sharply on spending.

For Saudi Arabia, the dollar peg has clearly become a liability. =20
Inflation has risen to 4pc and the M3 broad money supply is surging =20
at 22pc.

The pressures are even worse in other parts of the Gulf. The United =20
Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar =20
it has reached 13pc.

Kuwait became the first of the oil sheikhdoms to break its dollar peg =20=

in May, a move that has begun to rein in rampant money supply growth.=