BREAKINGVIEWS-Qatar currency peg is weapon of mutual destruction – Nasdaq

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(Fixes wrong paragraph break.  The author is a Reuters
Breakingviews columnist.  The opinions expressed are his own.)
    By Andy CritchlowLONDON, June 19 (Reuters Breakingviews) - Qatar's peg with
the U.S. dollar is a potential headache - and a potent economic
weapon. The emirate's fixed currency has supported financial
stability in a small country that overwhelmingly depends on
energy exports. Tensions with Gulf neighbours may make fears of
a devaluation of the riyal self-fulfilling. But breaking the peg
could also turn the tables on Qatar's enemies in the region.
    Pressure has built up on the currency since an alliance led
by Saudi Arabia and the United Arab Emirates imposed an economic
blockade two weeks ago. They want Doha to sever ties with Iran
and militant groups such as the Muslim Brotherhood, as well as
shutting down its troublesome Al Jazeera news network. Food
imports have been blocked and some exports disrupted. Qataris
have been ordered to leave neighbouring states.
    The blockade has hit confidence in the currency. On June 9,
the riyal hit its lowest level since December 2015 in the
offshore market, raising fears of a harmful devaluation. To
defend the peg, Doha can ask its state-owned banks to buy more
riyals, or raise interbank rates. But both strategies have
limits. The longer the blockade drags on, the more expatriates -
who account for 94 percent of the total workforce - are likely
to withdraw their money. In the worst-case scenario, Qatar might
have to impose capital controls to prevent cash leaving the
gas-rich peninsula.
    But Qatar can afford to defend the peg - which has been in
place since 2001 - at around 3.64 riyals to U.S. dollar. Despite
weak energy prices it is likely to earn $70 billion in
hydrocarbon export income and post a modest current account
surplus this year. It can also fall back on about $36 billion of
foreign currency and gold reserves without tapping its vast
sovereign wealth fund.
    Breaking the peg would probably trigger a faster rush to the
exits, and lead to painful inflation. But it would also be
potentially more dangerous for Qatar's rivals. Saudi Arabia, the
region's largest economy, could find its own riyal under
assault. Monetary policy coordination and the goal of a common
currency across the Gulf Co-operation Council would likely
collapse. In that instance Qatar's currency peg could become a
weapon of mutual destruction.
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    - The Qatari riyal's peg to the U.S. dollar has come under
pressure since a partial economic blockade was imposed by a
coalition of Arab states led by Saudi Arabia.
    - The value of the riyal in the offshore forwards market
fell to its lowest level since December 2015 on June 9 when the
decline in global oil prices raised fears over the region's
    - The riyal recovered slightly in the spot market on June 19
and was trading at around 3.67 to the dollar at 0853 BST. The
currency is pegged at 3.64 to the greenback.
    - For previous columns by the author, Reuters customers can
click on [CRITCHLOW/]

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living    [nL8N1J94KI]
BREAKINGVIEWS-Qatar crisis points to quick but uncomfortable fix
 (Editing by Peter Thal Larsen and Bob Cervi)
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