Is the US Dollar Expected to Rise? A Comprehensive Analysis of the Saudi

The US dollar rate in the Saudi market refers to the exchange rate of the US dollar against the Saudi riyal and other currencies. Since 1986, Saudi Arabia has maintained a fixed peg of 3.75 SAR per USD. This policy was adopted to ensure monetary stability, enabling long-term financial planning and stable local prices, especially since most government revenues come from oil exports priced in dollars.

The US dollar is the world’s primary reserve currency and dominates international trade. In Saudi Arabia, most external transactions are conducted in dollars, and a significant portion of foreign reserves is held in USD. This peg makes the local economy relatively sensitive to global fluctuations in the dollar’s value, even if the official rate against the riyal remains unchanged.

Economically, pegging to the dollar provides greater confidence for investors and businesses in the Saudi market, reducing exchange rate risk that could affect import and export costs. However, the peg does not eliminate the indirect effects of global dollar movements, such as changes in imported goods prices or inflation resulting from currency shifts.

Saudi Arabia adopted the dollar peg in the mid-1980s to achieve monetary stability and counter global volatility. This strategic decision was driven by the fact that most of Saudi Arabia’s oil revenues are in dollars and the dollar dominates a large share of global reserves.

Key outcomes of this policy include:
- Exchange rate stability: Shields the Saudi market from sharp fluctuations in the local currency, supporting price stability and facilitating government and private budgeting.
- Stable international trade: Most goods imported by Saudi companies are priced in dollars or currencies pegged to it, making financial planning easier.
- Monetary policy alignment: The peg requires the Saudi Central Bank (SAMA) to adopt monetary policies closely aligned with those of the US Federal Reserve, especially regarding interest rates.

Nevertheless, the peg leaves the Saudi economy exposed to the indirect effects of US monetary policy, such as changes in borrowing costs or inflation, as well as the impact of the dollar’s strength in global markets.

The US Dollar Index (DXY) is a key measure of the dollar’s strength against a basket of major global currencies (euro, Japanese yen, British pound, Canadian dollar, Swiss franc, and Swedish krona). At the start of 2024, the index stood at 103 points, gradually declining to 100–101 points by mid-year, influenced by expectations of US monetary easing and lower inflation.

This index is significant for the Saudi market as it reflects the dollar’s global purchasing power. If the index rises, the dollar strengthens against other currencies, meaning Saudi imports from Europe, Japan, or China could become relatively cheaper (if product prices remain unchanged). Conversely, a lower index may indicate stronger competing currencies or reduced confidence in the dollar.

Historically, the dollar remains strong despite some fluctuations, and much of Saudi Arabia’s financial stability is linked to this index. A significant decline could increase imported inflation or impact Saudi Arabia’s balance of payments.

Interest rates set by the US Federal Reserve play a pivotal role in determining the global appeal of the dollar. In 2024, the Fed held rates at 5.25–5.50% until mid-year, then initiated a 25 basis point cut to 5.00–5.25%. These decisions affect global capital flows, with higher rates boosting demand for the dollar due to higher investment returns.

Saudi Arabia, due to the peg, closely follows US monetary policy. The Saudi Central Bank maintained high rates (SIBOR around 6.25%), with expectations of gradual cuts in line with the Fed. Any lag in response may create temporary pressures on local liquidity or borrowing costs.

Any US rate hike or cut is typically mirrored by Saudi Arabia, maintaining the peg and indirectly influencing investment decisions, financing costs, and local property and consumption prices. This joint policy ensures the USD/SAR rate remains stable, though the dollar’s global impact may be felt in other markets.

The US saw annual inflation drop to around 3.4% at the start of 2024, while Saudi inflation hovered between 2.5–3%. Inflation differentials partially affect the purchasing power of both currencies, but the official peg limits their direct impact on the exchange rate.

When US inflation rises faster than in Saudi Arabia, the dollar’s global purchasing power may erode, but the peg shields the Saudi market from sharp volatility. Nevertheless, Saudi Arabia imports some US inflation through goods priced in dollars or imported from the US.

Higher US inflation typically prompts the Fed to raise rates, strengthening the dollar and increasing pressure on emerging markets. Saudi Arabia benefits from currency stability and imports limited inflation, with greater ability to control local prices through government support or fiscal policy.

Oil is the main source of Saudi government revenue and is globally priced in dollars. In 2024, Brent crude prices ranged from $75 to $85 per barrel, boosting Saudi revenues and raising foreign reserves to $445 billion.

When oil prices rise, dollars flow into the Saudi economy, increasing liquidity and financial stability, and supporting the Central Bank’s ability to defend the peg. High oil prices also ensure the dollar remains the primary currency for energy transactions, reinforcing its global status.

Conversely, falling oil prices reduce dollar inflows to Saudi Arabia, potentially pressuring reserves and increasing the need for spending cuts or borrowing. However, current high reserves provide Saudi Arabia with a significant safety margin against oil or dollar volatility.

By the end of 2024, Saudi Arabia’s foreign currency reserves reached about $445 billion, mostly in US dollars. This large reserve base provides monetary stability and flexibility to withstand financial shocks or oil price fluctuations.

The substantial reserves enable Saudi Arabia to defend the official SAR/USD rate even during crises. They also reflect high confidence in the Saudi financial system and enhance the Kingdom’s ability to meet international trade obligations and support major government investments.

Ongoing trade and current account surpluses ensure a steady dollar inflow, supporting market balance and protecting against sudden currency swings. These reserves are a key factor in maintaining USD/SAR stability and investor confidence in the Saudi market.

The US dollar’s dominance faces challenges from major currencies such as the euro, Japanese yen, and Chinese yuan. In 2024, the dollar remained relatively strong against these currencies:
- Euro: Ranged between $1.10 and $1.12 per euro, affected by European energy crises and uneven economic growth.
- Japanese yen: Weakened significantly in 2023, then partially recovered in 2024 to 140–150 yen per dollar due to Japanese monetary reforms.
- Chinese yuan: Remained stable at around 7.2–7.4 yuan per dollar by end-2024, with continued government controls on currency movements.

Despite some countries’ efforts to reduce reliance on the dollar, it still accounts for 54% of global central bank reserves. Digital currencies and lower-tier reserve currencies (such as the Canadian and Australian dollars) have not yet meaningfully challenged the dollar’s dominance in trade and reserves.

Although the SAR/USD rate is fixed, the dollar’s global strength indirectly affects the Saudi economy. When the dollar rises against other currencies:
- Saudi imports from Europe or Asia (such as cars and electronics) become less expensive, provided source prices remain unchanged.
- The cost of dollar-priced raw materials and goods increases for countries not pegged to the dollar, which can affect the competitiveness of Saudi exports in some markets.
- A stronger dollar increases the value of Saudi reserves in dollar terms compared to other currencies, enhancing the Kingdom’s financial strength.

Conversely, a weaker dollar may raise the cost of imports priced in other currencies and reduce the value of foreign reserves, but it could also boost Saudi export competitiveness in global markets.

The years 2024 and 2025 witnessed significant geopolitical events, including the ongoing conflict in Ukraine, Middle East crises, and energy price volatility. International crises often strengthen the dollar as a safe-haven currency, but in 2024 these effects were relatively moderate on the dollar index.

On the technology front, Saudi Arabia launched the e-riyal project to enhance local payment efficiency. While this initiative will not directly affect the dollar rate, it may gradually reduce the need for dollars in some domestic transactions over the long term.

Technological and geopolitical developments remain important factors shaping global capital flows and, consequently, demand for the dollar, ultimately impacting local markets in Saudi Arabia.

Most international reports (such as those from the IMF, World Bank, and credit rating agencies) indicate that the dollar will maintain its strong position as a global reserve and trade currency in the near term, despite some temporary index declines.

Forecasts for 2024-2025 suggest continued stability in the USD/SAR exchange rate, while the dollar index may fluctuate within the 100–103 range, depending on US economic strength and interest rate policies. There are currently no signs of a sharp or sudden rise in the dollar during this period, especially as major central banks move toward more accommodative policies and global inflation subsides.

Nonetheless, the dollar remains vulnerable to sudden movements in the event of major financial or geopolitical crises, or if global economic balances shift dramatically. It is therefore advisable to monitor global monetary policy developments and understand their impact on the local market.

Saudi Vision 2030 aims to reduce reliance on oil and diversify the economic base by developing new sectors such as tourism, industry, and technology. Nevertheless, the dollar remains a central pillar in economic planning, as most international transactions are still conducted in USD.

Dollar stability helps attract foreign investment, finance mega-projects, and ensure stable foreign trade. The large dollar reserves also provide sustainable funding for government initiatives, even during periods of low oil prices or global economic downturns.

Saudi Arabia’s economic transformation may gradually reduce oil’s share of GDP, but the need for the dollar will persist in the near term, especially with the ongoing currency peg and the dollar’s importance in trade and investment financing.

Investors in Saudi Arabia closely monitor global dollar indices, Federal Reserve decisions, and local and global interest rates to understand future trends. Tracking these indicators helps make more informed investment decisions, particularly regarding imports, project financing, or currency diversification in investment portfolios.

It is important to use financial analysis platforms such as SIGMIX to access accurate data and impartial analyses on global markets, currency indices, and economic forecasts. Diversifying investment tools and avoiding overreliance on a single currency or sector is also recommended.

Ultimately, consulting a licensed financial advisor is essential for risk analysis and implementing appropriate hedging strategies, especially given global variables that may indirectly affect local prices.