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Pressure on Qatari currency rises after Saudi-led demands

Pressure on Qatar’s currency peg heightened on Friday after the Arab states leading a blockade against the kingdom outlined a list of demands that observers said are unlikely to be met, raising the prospect of an extended diplomatic deadlock.

The Qatar Central Bank attempts to keep the riyal fixed in an extremely narrow range around 3.64 per dollar, but at publication time the currency was trading at 3.7450 per dollar, having weakened as far as 3.7623 earlier in the morning, according to Bloomberg data. That is its weakest level on record according to Bloomberg data going back to 1988.

The central bank has massive foreign exchange reserves and has stated its commitment to supporting the currency in the long term, even if the low liquidity in spot markets means some institutions are trading the riyal outside its normal range.

Still, the shifting momentum, particularly in futures markets, points to souring investor confidence that the diplomatic crisis will come to an end soon.

One-year forward points – which are used to determine prices to exchange riyals for dollars via futures contracts – had been easing in recent days after spiking when the blockade began on June 5. However, they jumped sharply on Friday morning after details of the demands were reported.

The 13-point list issued by Saudi Arabia, the UAE, Egypt and Bahrain includes requests to halt military cooperation with Turkey, shut down the Al Jazeera television channels, and pay reparations to the countries leading the boycott.

Qatar’s foreign minister has previously said any demand to close Al Jazeera would be rejected, and the country’s ambassador to the US told the FT earlier this week that its opponents “want to undermine our sovereignty”.

S&P downgraded Qatar’s sovereign credit rating earlier this month, while Fitch put the government on negative credit watch, with both ratings agencies warning that a sustained political crisis could have a serious negative impact on Qatar’s economy and creditworthiness.