Saudi riyal remains unaffected by dollar depreciation ...

30 November, 2011

Saudi riyal 'remains unaffected by dollar depreciation'

Arab News - During a seminar hosted by Sidra Capital, leading Turkish Economist and Strategist Erda Gercek reiterated that the Saudi currency would not be affected by the depreciation of the US currency. He emphasized that the currency exchange prices in the Kingdom and the world will remain stable thanks to dollar reserves.

Gercek's made the statement at the seminar during which the demise of the dollar and its future as world's reserve currency was presented. Gercek gave an overview of the global financial and economic situation and provided further insight into the future of the dollar and its impact on the riyal.

Hani Baothman, CEO of Sidra Capital, said: "We hosted this seminar in order to shed light on the current volatility in the market as a result of the euro crisis which has ballooned with each passing day, in addition to the festering economic crisis in the United States as a result of its political indecision to tackle the mounting budget deficit and the swelling of its public debt."

He added: "Our aim is to connect with our shareholders and stakeholders in order to provide them with the most relevant and most objective information as it pertains to the persistent doubts about the ability of the US administration to face the challenges ahead and what it means to the position of the dollar as a reserve currency and how that might affect its position against the worlds' major currencies."

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In its New World Economy Report, published by the IMF, the report predicted that the dominance of the dollar in the international financial system will end by 2025, and it will be replaced by a tri-polar system consisting of currencies including the greenback, the euro and the Chinese yuan. IMF report stated that this would happen when the dollar loses its position as an undisputed global currency by that year.

Gercek said the dollar remained the world's main reserve currency and that it would remain so for the foreseeable future. "This is based on structural reasons such as the size of the American economy, which is still the largest in the world, the depth and breadth of America's financial markets, which is still unchallenged and its liquidity remains unsurpassed. More importantly America's institutional framework and its robust strength are still superior, especially in the areas of governance and the rule of law, which are paramount if economic activity is to be created and sustained over the long term," he said.

"US can sustain larger trade deficits than any other country as capital inflows are almost guaranteed," Gercek said. "Reserve currencies come and go, but there is no obvious one to replace the dollar yet. This does not mean the dollar is on a constant depreciation path. Currencies are mostly part of the solution not the problem. And weak dollar is exactly what the doctor ordered for the US economy," Gercek said.

With regards to America's political standing, its dominance coincided with its emergence as the world's sole and undisputed power with the collapse of the Soviet Union in 1990. As such, and after the Bretton Woods system that came into existence in 1946, the dollar replaced the sterling pound as the world's reserve currency.

However, with the slow rise of other regional powers, notably China, India and Brazil, a multi-polar world order is likely to emerge over the course of the next few decades. With that rise and as a result of America's persistent budget deficits, mounting public debt and balance of payment problems, coupled with political indecision to solve its chronic structural problems, the supremacy of the dollar will likely slide in tandem with its retreating political and financial dominance.

The American dollar is described as Triffin Paradox, which refers to the conflicts of interest that occurs as a result of short-term domestic and long-term international economic objectives, given its position as a national currency and the international reserve currency. It is used as an international source of liquidity; as such the United States needs to run trade deficits to provide liquidity to the rest of the world and this has helped global growth over the last 30 years. Global imbalances and low US savings were obvious side effects of this policy.

Gercek discarded the rumors that America is printing more money. He indicated that the US currency's strong position comes from exchange of reserves in dollar between central banks and commercial banks. Thus, the American government is simply balancing its inflows and outflows.

He clarified that emerging markets cannot simply be bystanders to this process by hinting or engaging in a “currency war.” They were part of the problem during the buildup to the global imbalance. Now they need to be part of the solution and accept that the old model of mercantilist growth is no longer an option. Interconnectedness will make sure "one for all and all for one." Failure to see this will have dire repercussions for all.

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