Watch the Saudis for Dollar Direction

Tuesday, July 15, 2008 4:19 PM

By: Hans Parisis

Once the Saudi parliament, the Saudi Shura (Majlis as-Shura in Arabic), advises the King to revalue the riyal, the outlook for the U.S. dollar becomes seriously bearish.

That's because the question about de-pegging from the U.S. dollar is no more if, but when.

Since 2002, we have seen that the U.S. dollar is negatively correlated with oil prices. The Saudi dollar peg and that of its Gulf neighbors has had its pros and cons:

On the pro side, depreciation benefits the nascent non-oil sector in a limited way; currency stability attracts foreign investment and eases planning for debt repayment; and a dollar peg reduces trade and financial transaction costs while providing a credible nominal anchor.

On the con side, low or negative “realâ€