"Fatwa Against the Dollar?"

I’m a bit late to the somewhat sensationalistic piece, “Fatwa Against the Dollar” by Ambrose Evans-Pritchard at the Telegraph. The reason I say “somewhat” is that the underlying issue that Evans-Pritchard points to, namely, dollar-peg-induced inflation in our trading partners, is real and becoming more acute. And Evans-Pritchard emphasizes an aspect that gets insufficient play in the US media, that inflation in the Gulf states and China has gotten sufficiently high that it is creating domestic strife (it tends to be acknowledged but only in a passing sentence or two). For example, China has resorted to desperate measures, including a price freeze and a clampdown on bank lending.

The Evans-Pritchard piece does serve a purpose as a counterbalance to the tendency to underplay the importance of internal stresses. Many commentators dismiss the notion, for instance, that the Gulf States would take action that would lead the dollar to fall against their currencies, arguing that they would suffer large losses on their dollar holdings. Well, inflation is a tax on domestic wealth, so pick your poison. Moreover, the prime objective of any ruling class is to retain its power. If any governing group had to choose between trashing the value of their dollar reserves (a hidden cost, by the way) or securing their position, it’s clear which one they’d pick.

Mind you, I am not saying these leaders face that binary choice of dumping dollars or risking their authority. But they face growing tension along that axis. And while US investors for the moment believe that monetary easing will be limited by the Feds’ worries about inflation, if we have continued stress in the financial markets, the Fed will ease further, heightening the pressure on countries with currency pegs.

From the Telegraph:

To all intents and purposes, the Wahabi religious establishment of Saudi Arabia has just issued a fatwa against the US dollar. This bears watching.

A message issued by 26 leading clerics warns that inflation has reached intolerable levels in the Gulf kingdom.

While it does not vilify the dollar explicitly, the apparent political aim is to undermine the country’s dollar peg.

“The rulers should seek to try to remedy this crisis in a way that would ease people’s suffering.”

“We direct this message to the rulers and officials: we remind you of Prophet Mohammad’s words that you are shepherds who are responsible for your flock,” it said.

The statement was posted across the Islamic world. The background to this has been a raging debate in Gulf religious and economic circles about the destructive effects of the sliding dollar.

Among the lead-authors is Sheikh Nasser al-Omar, known for his fatwa against US-led forces in Iraq.

He has long preached the collapse of American-led capitalism, and now sees a perfect moment to plunge the knife. We can guess that al-Qaeda Inc is thinking along the same lines.

My own hunch is that the next al-Qaeda strike will not be a symbolic blow to a great building or city, but rather a carefully-timed economic blow: either by cutting – or trying to cut – the oil jugular, or by trying to precipitate a run on the dollar.

The Gulf pegs are preventing the region from taking action to stop the oil boom spiralling out of control.

Half the Mid-East is now overheating. Property booms have reached unstable extremes in almost all the oil states. Construction has become maniacal.

CPI inflation is 5.35pc in Saudi Arabia, the highest in over ten years. It has reached 10.1pc in the United Arab Emirates and 12.2pc in Qatar.

The dollar pegs – designed to anchor the currencies – are now forcing the Petrodollar economies to import US devaluation and monetary stimulus.

What has been a simmering problem for over a year, has become untenable since the Federal Reserve began slashing interest rates.

The Gulf has roughly $3.5trn under management in wealth funds and central banks, so a dollar shift makes waves.

Qatar has already slashed the dollar holding of its future generation fund from 40pc to 98pc.

Stephen Lewis, global strategist at Insinger de Beaufort, said the Fatwa was ominous.

“The Saudi government has been the one institution in the region battling to preserve the oil link with the dollar. If these clerics are able to wear down Saudi resistance, this could breach the bulwark. The dollar would quite likely be abandoned as the chief currency for pricing oil in world markets,” he said.

If the Mid-East breaks the pegs, a chain reaction threatens to follow across Asia. China now has 6.9pc inflation. It may have to ditch its cheap yuan policy soon enough anyway, or face the sort of double digit rises that destroy regimes.

The Saudi royal family rules by a delicate compromise. Although pro-Western in military and economic alliances, it relies on the endorsement of the Wahabi clerics as a key source of legitimacy.

Reluctance to confront this menacing bloc is the main reason why Riyadh tolerated – and helped – the Bin Laden network for so long.

The statement called on the Saudis to take action to stop food price soaring to fresh highs, if necessary with subsidies on key staples.

For now, the dollar is bouncing back. Speculative flows have swung back from euros to dollars after America’s CPI inflation shock of 4.3pc released last week.

One week’s data mean nothing. As the Fed cuts rates ever further to the cushion US property crash bites, Mid-East inflation will go from bad to seriously ugly with the policies now in place.

The Saudis, Qataris, and Emirates have all said they will preserve the pegs. But fatwas tend to up the ante


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  1. NC Jim

    Others smarter than I have said this before but I think it bears repeating.

    The official policy of the US is to devalue the dollar.

    The rest of the world must adjust according to their own self interest.

  2. Yves Smith

    You’d be amazed at how many people who argue otherwise. Have you noticed the articles talking about how the dollar has bottomed? This despite the number of countries maintaining pegs that aren’t sustainable unless the US makes radical changes (unlikely).

    And it can’t be official policy, merely de facto policy. Otherwise, the Chinese and Saudis who are shoring up our banking system would be fools to buy now.

    And I suspect that at least a few people at the Fed (but maybe not enough to matter) are worried about the destabilization that would take place if the dollar fell too quickly. But it is hard to manage an orderly decline.

  3. Mike

    Great post, Yves. This is one topic I follow, and was completely ignorant of the fatwah angle.

    Of course, Kuwait abandoned their peg to the dollar last May, and that was good for Kuwait.

    And when they say they are keeping their peg, “and that’s final,” should I take that to mean “de-pegging in eminent?”


    “Revaluation likely says UAE

    DUBAI: Gulf Arab oil producers are considering allowing their currencies to appreciate after agreeing to keep pegs to the weak dollar, the United Arab Emirates central bank governor was quoted yesterday as saying.

    “Revaluation of domestic currencies … is still an option on the table for central bank governors in Gulf countries,” the London-based Al Hayat newspaper quoted UAE central bank governor Sultan Nasser Al Suweidi as saying.

    But “the decision not to de-link Gulf currencies to the US dollar is final,” he said, according to the paper.

    Forward rates showed investors were expecting the dirham to appreciate 3.4 per cent in a year and the Saudi Arabian riyal to rise about 1.6pc in that time.
    … “

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