Saudi Arabia “Divorcing” The U.S. Dollar?
The London Telegraph reports that Saudi Arabia seems poised to re-peg its currency to avoid inflationary pressure caused by the weakening American Dollar. This move would have serious effects on the United States.
The first major consequence of this is that any change in the Riyal to the Dollar would significantly impact the cost of oil. By increasing the value of the Riyal relative to the value of the dollar, the cost to produce and transport oil within Saudi Arabia would increase (from the U.S. consumer’s perspective) overnight. Nearly all oil traded in the Middle East is done using the Riyal pegged to the dollar.
The second consequence is that Saudi Arabia, our close friend and ally, holds a significant number of U.S. Treasury Bonds as well as other public and private securities. As the dollar weakens against other international markets, investing in the United States becomes less and less attractive. The only way to make U.S. Treasuries more attractive is to increase the interest rate, which is exactly the opposite of what the Fed recently did when cutting interest rates to spur the stagnating economy.
Other countries seem very concerned about the U.S. dollar. Meanwhile, in America, the government is practically shutting-down to castigate MoveOn.org about a newspaper ad . . .
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