Saudi Arabia and the Question of Unpegging

01/18/2016 9:00 am EST

Focus: CURRENCIES

Although the Saudi Arabian riyal is currently pegged to the US dollar, the crash in oil prices has put considerable pressure on Riyadh, so Cina Coren, of DailyForex.com, examines whether or not unpegging the USD seems likely for the currency in the near future.

Crude prices continue to spiral down and where it will bottom out is anyone’s guess. Integrally involved in this oil crisis is Saudi Arabia and some investors are suggesting that what happens in this country may have enormous consequences for global markets.

The Saudi Arabian riyal is currently pegged to the US dollar, but the nosedive in oil prices has increased speculation in the market that the world's largest oil exporter may allow the 3.75-to-1 peg to drop off in hopes of slowing down revenue.

The crash in oil prices has put considerable pressure on Riyadh which doesn't have the budget or reserves to deal with oil at such a low price. Crude oil dipped below $30 a barrel last Tuesday, the lowest since 2003.

Unpeg the Dollar?

Unpegging the dollar is a drastic move and the Saudi government is loath to take it insisting that it won’t happen. Should Saudi Arabia decide in the end to unpeg its currency, it could shake the country's economy, as well as other markets around the world and according some analysts, Saudi Arabia will want to keep the dollar peg in order to avoid market uncertainty and potential inflation.

The same analysts believe that any riyal de-pegging scenario is more likely to occur in a few years’ time rather than in 2016. And even with oil hovering at $30 levels, Saudi officials are still not looking to cut oil production.

What Does It Mean When We Suggest That a Currency is “Pegged to the Dollar?”

A dollar peg is when a country keeps its currency's value at the same exchange rate to the US dollar. To read the entire article click here…

By Cina Coren, Contributor, DailyForex.com

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