Qatar’s longstanding currency peg came under renewed pressure on Wednesday morning after US president Donald Trump backed Saudi Arabia and other Arab nations that accused the kingdom of supporting terrorism.
The riyal fell to an 18-year low and the premium demanded to guarantee future trades in the currency rose to an all-time high.
The Qatari riyal is fixed in an extremely narrow range around QR3.64 per dollar, but the central bank’s commitment to the peg has been tested since the start of the week, with the riyal falling to 3.6505 per dollar shortly before publication.
That might only be a 0.24 per cent move since the end of last week, but it still marks the riyal’s weakest level since 1999.
Futures contracts suggest expectations in some quarters that the peg could come under more sustained pressure if Qatar’s problems continue. Dollar-riyal 12-month forward points – which are used to determine prices to exchange riyals for dollars in a year’s time – rose to a high of 700 shortly before publication time, more than three times last Friday’s level, before falling back.
The forward points implied traders would have to pay QR3.7205 a dollar to secure delivery in 12 months. The premium over the current exchange rate is the largest ever, according to Bloomberg data going back to 1988.
US president Donald Trump yesterday publicly backed efforts to isolate Qatar for allegedly supporting terrorism, after four Arab nations led by Saudi Arabia cut diplomatic ties with their neighbour.
Investors have speculated that a prolonged dispute could increase pressure on the riyal if government finances suffer from reduced trade and foreign investors pull assets out of the country. Around a quarter of non-resident assets in Qatar’s commercial banks come from other Gulf Cooperation Council nations, according to Fitch.
Bankers say Saudi banks are already looking to sell off their loan exposure to Qatari lenders, and local traders are worried about the closure of critical transport routes through which Qatar imports the majority of its goods.
However, analysts are sceptical about the chances of Doha’s peg breaking, pointing to the country’s massive reserves of foreign assets which could be used to support the currency.
A strong dollar combined with low oil prices have raised questions about the currency pegs of a number of Gulf states in recent years, but the buck’s recent weakness – the dollar index is around its weakest level since President Trump’s election – also reduces the immediate pressure on the riyal.
In addition to the fluctuations in its currency, Qatar’s stock market is also struggling, though it has steadied after its particularly rough start to the week. The Qatar Exchange Index dropped more than 7 per cent on Monday and a further 1.6 per cent yesterday. At publication time it was down less than 1 per cent for the day.