JEDDAH: Saudi Arabia is projected to keep its currency pegged to the US dollar next year, Jadwa Investments said in its latest study. Although the Saudi Arabian Monetary Agency (SAMA might slightly raise interest rates toward the end of 2011, they will remain at historical low levels, the study also said. "The riyal will remain pegged to the US dollar during 2011. We do not expect any serious discussion on breaking the peg or speculative pressure against the peg. Dollar movements are likely to be driven by the same themes as 2010; weakness in developed economies and strength in emerging economies," it said. "The exchange rate peg to the US dollar and the lack of capital controls mean that interest rates in the Kingdom need to broadly shadow those in the US. We see little chance of noticeably higher interest rates in the US in 2011," it said. "Currently, the US is loosening monetary policy. With the main US interest rate, the Fed funds rate, effectively as a low as it can go, the Fed is stimulating the economy through the creation of new money known as quantitative easing." The report said it is premature to assess whether the current program of quantitative easing, set to run until the middle of 2011, will then cease. "SAMA has some scope to move interest rates independently from the US and we do anticipate a modest increase of 0.25 percentage points in both the repo and reverse repo rate toward the end of the year," Jadwa said. "We think this will be prompted by the gradual normalization of bank credit conditions and more specifically, by the likely return of annual bank lending growth to close to double-digits….. the other instance in which SAMA would look at hiking interest rates would be if serious domestic inflationary pressures emerge, which we do not anticipate." "As with 2010, we expect currency movements will be volatile and subject to swings in sentiment about the relative health of the economies of the US, Japan and eurozone. These are likely to cancel each other out over the course of the year and therefore think the dollar will be relatively little changed during 2011," it noted. The study moreover said forecasts point to a modest strengthening of the dollar against euro and weakening of the dollar against yen by the end of 2011. It added that a further depreciation of the dollar against emerging market currencies is anticipated as the more robust performance of emerging economies will continue to draw in financial flows from developed economies, which will be exacerbated by creation of very cheap money through quantitative easing. The study pointed out that the strength of emerging market currencies against the Saudi riyal could well put upward pressure on inflation, as emerging markets are becoming an increasingly important source of imports. Data showed that the emerging markets were the origin of 42.8 percent of total Saudi imports in 2009 compared to 36.6 percent in 2004, it said. "Stripping out the countries with dollar pegs in the GCC lowers the totals to 37.9 percent in 2009 and 31.8 percent in 2004. China was the fastest growing supplier of imports over this period and is now the second largest source of the Kingdom's imports, so the anticipated appreciation of the yuan against the riyal." On price increase outlook, Jadwa said that although inflation will remain high, such will be driven by rents and imported price pressures and will therefore not be affected by interest rates. The dollar was mostly lower Monday in thin trading after the holiday weekend. The euro rose to $1.3144 from $1.3115 late Friday. The British pound fell to $1.5404 from $1.5441, while the dollar dropped to 82.84 Japanese yen from 82.90 yen. In other trading Monday, the dollar fell to 0.9608 Swiss francs from 0.9630 Swiss francs, and was barely changed at 1.0073 Canadian dollars from 1.0076 Canadian dollars.
