UPDATE 1-Dollar/Saudi riyal forwards jump on Iraq conflict

Mon Jun 23, 2014 6:29am EDT

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DUBAI, June 23 (Reuters) - The Saudi riyal fell sharply against the U.S. dollar in the forwards market on Monday because of the conflict in Iraq, bankers and traders in Dubai said.

One-year dollar/Saudi riyal forwards jumped as high as 50.50 points, their highest level since the Arab Spring uprisings hit the region in March 2011, from Friday's close of 25.00 points. The forwards later fell back to 38.00 points at 0955 GMT.

Sunni tribes took control of a border crossing between Iraq and Jordan late on Sunday after Iraq's army pulled out of the area following a clash with rebels, Iraqi and Jordanian intelligence sources said.

A banker at a major institution in Dubai said hedge funds and proprietary trading desks were buying the forwards in response to insurgent gains in Iraq, though he added that the market was not panicking and volumes remained moderate.

The Saudi riyal is pegged to the dollar, so forward contracts are often used as a proxy for trading the region.

The forwards remain much lower than their peak of 91.50 points in March 2011, when the Arab Spring briefly appeared to threaten political stability throughout the Gulf, and 255.0 points in November 2008, during the global financial crisis.

At Monday's peak, the forwards implied only a 0.2 percent weakening of the riyal against its 3.75 peg to the dollar over the next year - suggesting there is no significant pressure on the peg and major fund flows out of the riyal are not occurring.

Currency forwards for other major Gulf currencies, including the United Arab Emirates dirham and the Qatari riyal , did not rise sharply on Monday.

Financial markets generally believe the rich Gulf oil-exporting countries are insulated from the turmoil in Iraq, having demonstrated since the Arab Spring that they are able to use their oil wealth to buy social peace. Oil price rises due to Iraq could end up benefiting the Gulf states economically. (Reporting by Archana Narayanan; Additional reporting by Carolyn Cohn in London and Martin Dokoupil in Dubai; Writing by Andrew Torchia; Editing by Pravin Char)

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