Qatar riyal under no threat of devaluation

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Foreign Currency

The recent diplomatic crisis is affecting Qatar’s riyal with the currency being quoted weaker than its peg against the dollar, but experts are of the opinion that Riyal is under no threat of devaluation.

Back in 2001 the exchange rate of Riyal was officially fixed at 3.64 to the dollar; however, it is being offered for as low as 3.6680 since Saudi Arabia and other three countries cut diplomatic and transport ties with Doha on June 5 accusing it of backing terrorism. While the fluctuation isn’t a huge one, but it did mark the weakest spot market rate since July 2005, Thomson Reuters data shows.

Another thing is that previous depreciation in the value only lasted for a day or two; however, the latest decline has been on going for two weeks now.

Gulf bankers inside and outside Qatar, however, said they did not think the spot market quotes showed any change in Qatar’s determination or ability to maintain the peg. Instead, they said, the fluctuations seemed to be the result of the way in which economic sanctions against Qatar have distorted trading between banks.

Many Saudi, United Arab Emirates and Bahraini banks have cut back or suspended trading with Qatari institutions, fearing the displeasure of their governments. International banks have become more cautious because of political risk.

This has slowed foreign exchange trade, particularly between banks operating onshore and offshore, and caused bottlenecks in the supply of dollars to offshore institutions, pushing down the riyal.

Central Bank The emir’s 2001 decree establishing the peg said the central bank would “buy the dollar at a rate not exceeding 3.6385 riyals and sell the dollar at a rate not exceeding 3.6415 riyals to the banks operating in the State of Qatar”. It is continuing to do this, bankers said. A treasury banker at a Qatari bank in Doha said his institution remained able to obtain dollar supplies it needed from the central bank.

Because links between onshore Qatari banks and offshore banks in centres such as Bahrain and London have been damaged by the sanctions, however, these supplies are not reaching all corners of the market promptly.

Some traders said they were surprised the central bank had not acted immediately to quash any speculation about a change to the peg by releasing huge amounts of dollars into the market.

In his only public statement since the crisis erupted, central bank governor Sheikh Abdullah bin Saoud Al-Thani declared last week that Doha had “sufficient foreign currency reserves to meet all requirements” but did not explicitly mention the peg.

The central bank has $34.5 billion of net foreign reserves and the government may have more than $200 billion of additional liquid assets in its sovereign wealth fund. So for now, Qatar seems in no danger of running out of money to defend the peg.

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