Dollar: Understanding Its Impact on the Saudi Financial Market

The US dollar (USD) is the official currency of the United States and the most famous reserve currency in the world. The dollar serves as a standard for pricing global commodities, such as oil and gold, and is used in most international transactions. In the Kingdom of Saudi Arabia, the Saudi riyal is pegged to the US dollar at a fixed exchange rate of 3.75 riyals per dollar since the 1980s. This peg is managed by the Saudi Central Bank (Saudi Arabian Monetary Authority - SAMA), aiming to achieve monetary stability and reduce the risks of exchange rate fluctuations on the national economy.

This fixed peg provides the Saudi market with protection from significant fluctuations in the dollar's value against other currencies, positively reflecting on the stability of local prices, especially for imported goods and international payments. It also enhances foreign investor confidence, as it reduces currency risks when entering the Saudi market. On the other hand, major companies, particularly in the energy sector like Saudi Aramco, rely on the dollar for calculating their export revenues, making the dollar's performance a key factor in evaluating the financial performance of these companies.

For decades, the Saudi riyal has maintained a fixed exchange rate against the US dollar at 3.75 riyals per dollar. This rate has not changed in recent years (2024-2025), despite changes occurring in the global dollar index (DXY). This fixed peg means that fluctuations in the dollar against other currencies do not directly affect the riyal's price, reinforcing the stability of the Saudi financial market.

The stability in the exchange rate has numerous positive effects, including reducing price volatility risks, ensuring the stability of local asset values and investments, and facilitating financial planning for both individuals and companies. It also contributes to strengthening confidence among local and international investors, making financial transactions between the dollar and the riyal easier and less costly. On the other hand, this peg requires massive foreign currency reserves, which the Saudi Arabian Monetary Authority has achieved through a substantial dollar reserve of approximately $480 billion by the end of 2024.

Due to the peg of the Saudi riyal to the US dollar, Saudi monetary policy closely follows the trends of US monetary policy, particularly the decisions of the US Federal Reserve regarding interest rates. When the US Federal Reserve raises interest rates, the Saudi Arabian Monetary Authority often follows suit to avoid differences in investment attractiveness between the riyal and the dollar and to maintain the stability of the riyal.

In 2024, interest rates in the United States reached high levels (around 5.25-5.50%) aimed at curbing inflation, and Saudi banks maintained similar interest levels. This raised the cost of financing for banks and companies in the Kingdom, yet it preserved the attractiveness of the Saudi riyal against the dollar. Conversely, any move by the Federal Reserve toward lowering interest rates, as expected in 2025, is anticipated to lead to a gradual reduction in interest rates in the Saudi market, contributing to lowering financing costs for companies and individuals.

The dollar is the primary currency for most foreign investment flows into the Saudi financial market. When foreign investors wish to purchase shares or Saudi assets, they convert their dollars into Saudi riyals at a fixed exchange rate, which reduces currency fluctuation risks during investment. In recent years, with the move to raise the foreign ownership limit in listed companies to 100%, banking reports (such as from J.P. Morgan) have predicted that the Saudi market could attract an additional $10.6 billion in foreign investments.

These flows support liquidity in the financial market and enhance market depth and investor diversity. Here, the dollar is not only a means of conversion but also an indicator of the attractiveness of the Saudi market to the outside world. Additionally, the stability of the exchange rate reassures investors that the value of their assets will not be subject to sharp fluctuations due to currency changes, encouraging them to inject more capital.

The Saudi banking sector is influenced by the dollar from several key aspects. First, Saudi banks hold part of their assets and deposits in dollars to meet customer needs for international transfers and foreign investments. Second, the difference between US and Saudi interest rates affects banks' profit margins and local market liquidity.

Moreover, Saudi banks play a crucial role in financing companies that deal in dollars, especially oil and international trade companies. The stability of the peg between the riyal and the dollar makes the Saudi banking sector less susceptible to currency risks and facilitates financing and transfers. Additionally, international bond issuances in dollars by the Saudi government or major companies provide banks with new investment opportunities and help diversify income sources.

The energy sector, particularly the oil sector, is the most closely tied to the dollar in Saudi Arabia. All contracts for crude oil sales and global oil prices are denominated in US dollars. This means that the Kingdom's revenues from oil exports enter the state treasury in dollars, and then part of it is converted to Saudi riyals as needed for local use.

Changes in the dollar's price globally indirectly affect the profits of Saudi oil companies when converting their revenues to riyals, but due to the fixed peg, this impact remains limited at the local level. With oil prices stabilizing between $70-90 per barrel in 2024 and the rise in dollar cash reserves, the Saudi energy sector maintained strong revenues, positively reflecting on the national economy as a whole.

Since most of Saudi imports of essential goods (such as food, metals, and cars) are paid for in dollars, the purchasing power of the dollar directly affects the prices of these goods in the local market. When the dollar is strong globally, the cost of imports rises, which may drive local inflation rates up. Conversely, a weak dollar may contribute to stabilizing or even lowering inflation rates.

However, the fixed peg between the riyal and the dollar limits the impact of dollar fluctuations on inflation in Saudi Arabia compared to other countries with floating currencies. In recent years, Saudi inflation has recorded moderate levels (2-3%), reflecting the effectiveness of monetary policies and the abundance of dollar cash reserves.

The Saudi Arabian Monetary Authority maintains one of the largest dollar cash reserves in the world, with an average reserve of about $480 billion by the end of 2024. This massive reserve provides a strong buffer for the riyal against the dollar and contributes to enhancing the financial and monetary stability of the Kingdom.

The cash reserve is used to defend the fixed exchange rate in times of crises or external pressures, and it allows the government to finance major projects and settle international obligations with high flexibility. Additionally, the reserve boosts confidence in the Saudi economy and increases its ability to face global economic challenges.

Despite the dollar's dominance in international financial transactions and the Saudi market, there are some currencies and alternatives used in trade or investment. Among these currencies are the Euro, which is increasingly used in exchanges with the European Union; the Chinese Yuan, which has started to appear in some trade deals with China; and gold, which is considered a safe haven during periods of economic volatility.

Nevertheless, the dollar remains the primary currency for pricing oil and major transactions and foreign investments in Saudi Arabia. Gulf currencies (such as the UAE Dirham and Kuwaiti Dinar) or cryptocurrencies are used to a limited extent and do not pose a real threat to the dollar's position in the local market.

There is no direct product named "dollar" in the Saudi financial market (Tadawul), but there are many investment products linked to the dollar. Among the most important are:

- Sukuk and international bonds issued by the Saudi government or major companies in dollars, allowing local investors to invest in dollar-denominated financial instruments.
- Global investment funds that can be purchased through international platforms or Saudi banks.
- Futures contracts and financial derivatives that allow hedging against dollar fluctuations (currently being developed in Tadawul).
- Investing in global stocks through Saudi platforms that allow the purchase of US stocks denominated in dollars, including major technology and energy companies.

These products provide investors with opportunities to diversify their investment portfolios and benefit from global dollar movements.

The year 2024 witnessed several impactful developments in Saudi Arabia's relationship with the dollar. These include the continuation of the tight US monetary policy and interest rate hikes, prompting Saudi banks to keep pace with this policy. Additionally, there were announcements regarding raising the foreign ownership limit in Saudi companies to 100%, which is expected to attract billions of dollars in foreign investments.

The government also continued to issue international bonds in dollars to support development projects, with some issuances reaching up to $17 billion in December 2024. At the same time, initiatives to accept other currencies in some international contracts (such as the Chinese Yuan) emerged, yet the dollar remained the primary currency in settlements. On another front, there has been increased interest in electronic payments and digital dollars, with Saudi banks working on developing digital financial solutions that support transactions in dollars in international trade.

With the increasing digital transformation in the Kingdom, digital dollars and stablecoins (such as USDT and USDC) have become part of discussions about the future of international payments. In 2025, some Saudi banks launched pilot programs to accept digital dollars through digital wallets to facilitate foreign trade.

Additionally, the Saudi central bank is collaborating with other Gulf banks to develop a Gulf digital currency that may be dollar-backed, aiming to enhance regional financial integration. These steps reflect readiness to keep pace with global developments in financial technologies while maintaining the stability of the peg between the riyal and the dollar.

The dollar plays a pivotal role in shaping macroeconomic policies in Saudi Arabia. The peg of the riyal to the dollar contributes to macroeconomic stability, ensures the steady flow of oil revenues, and grants policymakers greater capacity for long-term planning without worrying about currency fluctuations.

On the other hand, the Saudi government closely monitors global developments related to the dollar, including US interest rate decisions, changes in financial markets, and global economic crises. Any significant change in the dollar's global standing or a decline in its strength requires Saudi policies to be flexible in adaptation, which is reflected in precautionary policies and substantial foreign currency reserves.