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Gulf dispute sparks worries over Qatar’s currency

Qatar’s currency has come under pressure from investors amid rising tensions in the Middle East, stoking worries that an escalating crisis could endanger the Gulf state’s longstanding peg to the US dollar.

The Qatari riyal is fixed at a strict rate of about QR3.64 a dollar. But the premium demanded to guarantee future currency trades has rocketed in the past two days, hitting levels last seen during the 2008 oil price collapse.

Dollar-riyal 12-month forward points have more than doubled from 202 to 475, according to Bloomberg data. That means traders wanting to exchange riyal for dollars 12 months from now would have to pay QR3.6955 a dollar using outright forward contracts.

When investors last demanded such a steep premium, oil prices were tumbling from about $145 a barrel in mid-2008 to about $30 by the end of that year.

Analysts at ING said “at this stage we’re not looking for a major run on the Gulf Cooperation Council pegs” but warned that “this space bears watching — Washington’s stance to Qatar will be key”.

Investors fear a prolonged dispute in the Gulf region — which has already seen companies such as Emirates suspend all flights into Qatar — could increase pressure on the riyal if government finances suffer from reduced trade and foreign investors pull assets out of the country.

The strength of the dollar in the past two years has raised questions about the capacity of Gulf currencies to maintain their pegs, particularly at times of falling oil prices.

But the dollar’s relative weakness should be another reason why the pegs are not under imminent threat. The dollar hit a seven-month low on Tuesday. 

“The dollar is unlikely to appreciate aggressively from current levels, so the stresses on the pegs will not be severe, as they were in the last two years,” said Peter Kinsella, currency strategist at Commonwealth Bank of Australia.

Risks to Gulf currency pegs are further tempered by the size of sovereign wealth funds. The Qatari fund, estimated to be worth $350bn in assets, could be used to support the peg.

Mr Kinsella added that pressure on the riyal was probably more related to volatility in the oil price, which fell again on Tuesday, “but certainly the tensions with Qatar don’t help”.

Rating agency Fitch agreed that Qatar’s large reserves of foreign assets “should allow it to manage temporary macroeconomic disturbances” but warned that a prolonged conflict could have a serious impact on measures such as inflation, trade, tourism and growth.

It predicted that “the countries involved will seek to avoid a prolonged stand-off with the attendant risks to Qatar’s economy and regional stability” but added that “there is considerable uncertainty given the punitive nature of the actions announced on Monday”.