Dollar vs. Riyal: Exchange Rate Stability in Saudi Market

The dollar versus riyal is an expression of the exchange rate of the Saudi riyal against the U.S. dollar, abbreviated as USD/SAR. Since 1986, the Saudi riyal has been linked to the U.S. dollar at a fixed rate of 3.75 riyals per dollar. This peg is part of a deliberate monetary policy by the Saudi Arabian Monetary Authority (SAMA) aimed at achieving comprehensive economic and monetary stability in the Kingdom.

The importance of the fixed peg stems from several aspects: First, this stability creates a predictable environment for investors and companies, allowing them to plan their budgets and manage their financial obligations with confidence against currency fluctuations. Second, since most of the Kingdom's exports, primarily oil, are priced in U.S. dollars, fixing the exchange rate facilitates the conversion of revenues into riyals without concern for currency loss. Finally, the peg enhances foreign investor confidence, as it limits investment risks arising from currency fluctuations, increasing the attractiveness of the Saudi market globally.

The stability of the dollar against the riyal not only means a stable exchange rate but also extends to the stability of local prices, as SAMA closely monitors the monetary policies of the U.S. Federal Reserve and adjusts local interest rates accordingly to maintain this peg.

Saudi Arabia officially began pegging the riyal to the U.S. dollar in 1986 after several experiments with different exchange systems in previous decades. This decision came in response to fluctuations in oil prices in the 1970s and early 1980s, as monetary authorities believed that linking the currency to the dollar would achieve greater stability for an economy primarily reliant on dollar-priced oil exports.

The Saudi Arabian Monetary Authority (SAMA) is responsible for implementing this monetary policy, maintaining the fixed exchange rate by managing substantial foreign currency reserves (exceeding $450 billion in 2024) and adjusting local interest rates in parallel with decisions from the U.S. Federal Reserve. SAMA does not need to intervene frequently in the open exchange market due to the strength of its cash reserves and the clarity of its policy. Only in exceptional cases may measures be taken to stabilize the peg if pressures are sensed.

These policies have bolstered confidence in the Saudi riyal and supported the Kingdom's position as a stable investment destination in the region, while also helping to maintain relatively low inflation levels compared to many developing economies.

The performance of the Saudi stock market (Tadawul) is indirectly linked to the stability of the dollar against the riyal. When the exchange rate is stable, listed companies in the market can estimate their costs and revenues more accurately, especially those reliant on imports or exports in dollars, such as oil and petrochemical companies.

For foreign investors, the stability of the exchange rate is a key incentive to enter the Saudi market, as it reduces the risks of currency fluctuations that could affect investment returns. Additionally, the stability of the dollar against the riyal prevents the emergence of unrealized gains or losses related to currency differences in the financial statements of companies, while markets with floating currencies often face this issue.

Furthermore, U.S. monetary policies affect the Saudi market through interest rates. When the Federal Reserve raises interest rates, SAMA typically follows suit to maintain the peg, impacting borrowing costs for Saudi companies and potentially reflecting on growth rates and profits. Overall, the stability of the dollar against the riyal is one of the key reasons that allows the Saudi financial market to exhibit relative stability compared to many emerging markets.

During 2024 and 2025, the Saudi riyal continued to be linked to the U.S. dollar at a rate of 3.7500 riyals per dollar. The local and global financial markets experienced very limited fluctuations for this pair, with the actual price in the parallel market ranging between 3.74 and 3.77 riyals, representing very slight movements (less than 1%).

Regarding monetary policy, SAMA maintained interest rates closely aligned with U.S. rates. By the end of 2024, the discount rate in Saudi Arabia was approximately 4.50%, while the U.S. federal funds rate ranged between 4.25% and 4.50%. With the Federal Reserve lowering rates in 2025, SAMA reduced the discount rate to 4.25% and continued to adjust interest on reserve balances at local banks to remain within the accommodating policy range.

Inflation rates in Saudi Arabia during this period remained moderate (2-3%), while foreign reserves continued to rise, exceeding $450 billion, enhancing the strength of the currency cover and the stability of the peg. This period did not witness any radical changes in the peg policy or challenges threatening its stability.

The foreign exchange market (Forex) in Saudi Arabia fundamentally differs from the stock market (Tadawul). While the Saudi stock exchange focuses on trading stocks, sukuk, and investment funds, foreign exchange trading is heavily regulated by SAMA and the Capital Market Authority, and individuals are not allowed to trade currency pairs like USD/SAR directly through trading platforms.

Only licensed banks and financial institutions are permitted to conduct currency conversions as banking services, while currency trading for speculative purposes is limited and reserved for Contracts for Difference (CFDs) through licensed brokers and specific categories of professional investors.

This regulation aims to protect the local market from global currency fluctuations and enhances the stability of the riyal, while the stock market remains more connected to the operational factors of companies and local and global economic policies. The main difference lies in the fact that the stock market is accessible to the public with high transparency, while the currency market operates within a more conservative banking framework.

Although there are no direct competitors to the dollar versus riyal pair in the Saudi market due to the fixed peg, there are investment alternatives that investors can resort to as competing or complementary assets.

Among these alternatives are other foreign currencies against the riyal (such as the euro or British pound), gold, oil, real estate, and diversified investment funds. Additionally, other Gulf currencies such as the UAE dirham or Bahraini dinar are also linked to the dollar, making competition in the currency space very limited.

Regarding investment options, investors may choose dollar-denominated assets abroad, invest in U.S. stock indices, or even commodities like gold and oil, as a means to diversify their investment portfolios away from the dollar versus riyal.

However, the fixed peg of the dollar against the riyal remains an attractive factor for investment in the Saudi market, limiting risks compared to fluctuations in other currencies.

The monetary policy pursued by the Saudi Arabian Monetary Authority (SAMA) plays a pivotal role in maintaining the stability of the riyal against the dollar. SAMA relies on managing substantial foreign currency reserves and closely monitoring global interest rate movements, especially decisions from the U.S. Federal Reserve.

When the Fed changes the interest rate, SAMA typically adjusts the discount rate and other rates accordingly to maintain the peg, taking into account local economic conditions. The primary goal is to ensure exchange rate stability, provide sufficient liquidity in the banking sector, and control inflation rates.

This policy reassures investors that the Kingdom is capable of defending the peg in the event of external pressures or global financial crises, as seen in previous crises where SAMA managed to maintain stability thanks to robust reserves and the strength of the Saudi economy.

Oil is considered the main source of revenue for the Kingdom of Saudi Arabia and is priced globally in U.S. dollars. Therefore, linking the riyal to the dollar makes the conversion of oil revenues to riyals smooth and stable, limiting the risks of exchange rate fluctuations on the state's budget.

When oil prices rise, the Kingdom's foreign reserves increase, enhancing SAMA's ability to defend the peg. However, during periods of declining oil prices, some pressures may emerge on cash reserves, but so far, Saudi Arabia has not faced actual challenges threatening the peg due to cautious financial policies and previous surpluses.

Additionally, the stability of the exchange rate facilitates government spending planning and limits fluctuations in public income, positively reflecting on the macroeconomy and the performance of companies listed in the Saudi financial market.

The fixed peg of the dollar against the riyal helps curb inflation in the Saudi economy, as any decline in the value of the dollar or rise in global inflation rates is partially absorbed through the flexible interest rate policies followed by SAMA.

In the event of rising inflation in the United States, some of its effects may transfer to Saudi Arabia, but with sufficient reserves and an active monetary policy, SAMA can intervene by raising interest rates or taking other measures to control prices.

Banking liquidity remains relatively stable due to clear monetary policies and the absence of currency fluctuations. This stability encourages local investment growth and business expansion, reducing the need for investors to hedge against currency risks.

Foreign currency trading operations in Saudi Arabia are subject to strict regulation by the Saudi Arabian Monetary Authority and the Capital Market Authority. Individuals are not allowed to trade currency pairs like the dollar against the riyal directly through trading platforms; currency conversion services are limited to licensed banks and financial institutions.

Brokerage firms wishing to offer Forex Contracts for Difference (CFDs) need to obtain special licenses and are subject to high regulatory requirements, and these products are typically available only to professional clients and institutions.

This regulation aims to protect monetary stability, prevent excessive speculation that could affect the exchange rate, and enhance investor confidence in the Saudi riyal as a stable and safe currency.

During 2024 and 2025, the Saudi economic landscape was characterized by relative stability in the exchange rate, with monetary policy being dependent on the movements of the U.S. Federal Reserve. As the Fed gradually lowered interest rates at the end of 2024 and the beginning of 2025, SAMA responded with similar cuts to the discount rate and interest on reserves.

Markets did not register any attempts or intentions to unpeg the currency; rather, the government repeatedly affirmed the importance of maintaining the current policy as a guarantee of financial stability. Local inflation data remained within acceptable ranges, and foreign currency reserves continued to rise, supported by improved oil prices and GDP growth.

The Saudi financial markets also witnessed an increase in confidence indicators, with rising foreign investment due to the clarity of the outlook regarding the future exchange rate, which enhanced the performance of the stock market and macroeconomic indicators.

The stability of the dollar against the riyal is subject to a range of regional and international factors. Among the most prominent of these factors are:

1. U.S. Federal Reserve Policies: Any changes in interest rates or quantitative easing policies directly reflect on Saudi monetary policy.
2. Oil Prices: As the world's largest oil exporter, Saudi Arabia relies on dollar-denominated oil revenues, which enhances the stability of the peg.
3. Geopolitical Conditions: Any political or economic tensions in the region may affect financial flows, but so far, no events have been recorded that led to real pressures on the peg.
4. Trade Relations with Gulf Countries and Major Powers: Most Gulf currencies are linked to the dollar, making the regional environment supportive of the continuation of the peg.

Overall, maintaining the peg requires constant vigilance from SAMA and the ability to respond quickly to international changes, areas in which the Kingdom has demonstrated high efficiency over the past decades.

Although the fixed peg between the dollar and the riyal has proven effective for decades, there are some theoretical risks that it may face in the future, such as:

- A sharp decline in oil prices sustained over a long period, which could reduce foreign reserves and create pressures on the exchange rate.
- Significant changes in the U.S. economy or the international monetary system that may require a reevaluation of the peg.
- Geopolitical shifts affecting capital flows or foreign trade.

However, current data indicates that Saudi Arabia enjoys massive reserves and flexible financial and monetary policies, making the risks of unpegging or changing the peg very low in the foreseeable future. With the government's and SAMA's continued commitment to the current policy, the dollar against the riyal remains one of the pillars of economic stability in the Kingdom.