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September 20, 2007

Is the Bin Laden Trade On? Saudi Arabia Breaks Dollar Peg

posted by MR WAVETHEORY at 9/20/2007 01:02:00 AM
For the first time ever, Saudi Arabia refused to lower interest rates after the Federal Reserve cut rates by 50 bps. There is massive panic in the currency markets right now on fears of a dollar collapse. Whoever sold $4.5 billion worth of S&P 500 calls may turn out to be a real genius. The $4.5 billion Bin Laden trade may be on!

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

All that oil money is causing inflation in the Middle East and Saudi Arabia so the Saudis are refusing to play ball with Bernanke. Big oops for Ben! Foreigners are no longer buying dollar bonds either and this could cause a collapse in the US bond market.

The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.

For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4pc and the M3 broad money supply is surging at 22pc.

The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar it has reached 13pc.

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