Dollar: Its Importance and Impact on the Saudi Financial Market in 2024-2025

The US dollar is the official currency of the United States, denoted by the symbol USD. Since the end of World War II, the dollar has become the world's primary reserve currency due to the Bretton Woods Agreement, which linked the dollar to gold, and later, after the decoupling, it became a major reference in global trade. Today, the dollar is used to price commodities such as oil and gold, representing a significant share of international reserves held by central banks worldwide. According to the Bank for International Settlements, the dollar accounts for about 88% of all daily currency transactions in the foreign exchange (Forex) market, making it a central hub in global financial transfers. This prevalence is due to the strength of the US economy, the volume of US international trade, and the stability of the legal and institutional frameworks governing the dollar. Additionally, investor and financial institution confidence in the US financial system enhances the dollar's status as a safe-haven currency during times of economic uncertainty. In the Gulf region, including Saudi Arabia, the dollar is a reference standard in trade contracts and international pricing, especially with the fixed peg of the Saudi riyal to the dollar.

Since 1986, Saudi Arabia has adopted a policy of pegging the riyal to the US dollar at a fixed exchange rate of 3.75 riyals per dollar. The primary goal of this peg is to provide monetary stability for the local economy, especially since the Kingdom heavily relies on oil exports priced in dollars globally. Stability in the exchange rate helps Saudi companies manage costs and financial planning without worrying about currency fluctuations. The peg also contributes to maintaining low inflation rates and provides an attractive investment environment for local and international investors. The Saudi Central Bank (SAMA) manages this peg through conservative monetary policies and substantial dollar-denominated foreign reserves. The peg also reduces risks associated with global exchange rate movements, especially amid international market volatility. From an economic perspective, the peg is considered a strategic option for a country that relies on revenues from a commodity priced in dollars, providing relative protection from oil price shocks or sudden global monetary policy changes.

Oil is priced globally in US dollars, making the dollar a crucial element in Saudi revenue calculations. When the dollar is strong, the value of oil sales increases when converted to other currencies, benefiting the Kingdom if it has international obligations or investments. In 2024, Saudi oil export revenues reached approximately $280 billion, almost all denominated in dollars. This reliance makes the Saudi economy sensitive to dollar movements in global markets. Moreover, most of the Kingdom's foreign reserves, amounting to around $500 billion, are denominated in dollars or invested in dollar-denominated assets, enhancing financial stability and protecting against fluctuations in other currencies. US monetary policy, particularly interest rates set by the Federal Reserve, has an indirect impact on the Saudi economy; when US interest rates rise, the cost of borrowing increases globally, including in Saudi Arabia, due to the close peg between the two currencies. Additionally, a strong dollar affects import prices, as imported goods become cheaper when the dollar is strong against other currencies.

Decisions made by the US Federal Reserve, especially regarding interest rates, significantly impact global financial markets, including the Saudi market. Due to the peg of the riyal to the dollar, the Saudi Arabian Monetary Authority (SAMA) often follows US interest rate movements to maintain currency stability and capital flow. In 2024, the US interest rate ranged between 4.75% and 5.00%, and SAMA followed these levels to maintain local market balance. Raising interest rates typically attracts foreign capital to the Saudi market due to monetary stability and good returns, but it may increase financing costs for local companies. Conversely, lowering interest rates increases market liquidity and encourages investment, but it may lead to inflationary pressures. Indirect effects also include changes in Saudi stock and bond prices due to changes in capital costs and movements of international investors seeking better returns.

The US dollar represents the world's primary reserve currency and is the center of gravity in global currency trading (Forex). The main competitors to the dollar are the euro, the Chinese yuan, the Japanese yen, and the British pound. However, the dollar retains a share exceeding 60% of countries' official cash reserves and is used in about 88% of total daily transactions in the currency market. The US Dollar Index (DXY) measures the dollar's strength against a basket of major currencies and serves as a benchmark for global movements. Competition between the dollar and other currencies becomes apparent during times of economic volatility or geopolitical changes, where some countries or institutions may seek to diversify their reserves away from the dollar. Nevertheless, until 2025, other currencies remain far from displacing the dollar from its dominant position, due to the depth of US financial markets, high liquidity, and confidence in the US economy.

Movements in the US dollar directly and indirectly affect Saudi companies, especially those engaged in international trade or reliant on importing raw materials. When the dollar is strong, dollar-priced imports become cheaper for local companies, potentially lowering production costs. Conversely, companies exporting their products abroad or dealing with international clients may see their profits affected when converting revenues from foreign currencies to the Saudi riyal. The fixed peg between the riyal and the dollar provides relative stability for these companies, but it also exposes them to US Federal Reserve policies and global dollar value changes. Additionally, a rising dollar against emerging currencies may give Saudi companies a competitive advantage in exports, as their products become more attractive to customers in countries with weakened currencies. Therefore, understanding dollar dynamics is essential for budgeting, pricing, and financial hedging for Saudi companies.

The US dollar serves as a key gateway for foreign capital inflows and outflows to and from the Saudi market. Most foreign investors use the dollar to convert their profits or inject new investments into the Saudi stock market (Tadawul). The stability of the exchange rate between the riyal and the dollar facilitates conversion and pricing operations, reducing currency fluctuation risks for international investors. In recent years, Saudi Arabia has enhanced its attractiveness to foreign investors by streamlining procedures and increasing foreign ownership limits in index funds and stocks, leading to increased dollar inflows into the local market. Furthermore, dollar stability provides a conducive environment for financing major projects and attracting investments in non-oil sectors such as technology and tourism. However, US monetary policies remain a significant factor influencing the volume and cost of these flows, highlighting the importance of monitoring dollar movements for investors and financial decision-makers in Saudi Arabia.

Saudi Arabia holds substantial foreign reserves estimated at around $500 billion in 2024, most of which are denominated in US dollars or invested in US assets such as Treasury bonds. This level of reserves provides the Kingdom with significant capacity to defend the peg of the riyal to the dollar, face financial crises, finance imports, and support developmental projects. The importance of the dollar in reserve composition stems from its high liquidity and relative stability, facilitating withdrawals or conversions in emergency situations. Additionally, the return on US assets is considered acceptable and competitive compared to other currency assets. At the same time, partial diversification of reserves towards other currencies such as the euro or yen occurs limitedly to mitigate risks, but the dollar remains the main component given the volume of oil trade and the Kingdom's international obligations.

Pricing commodities such as oil, gold, and some raw materials in US dollars means that dollar movements affect the cost of these commodities in the Saudi market. When the dollar rises against other currencies, oil and gold prices become more expensive for buyers outside the United States, potentially reducing global demand for Saudi oil exports. Conversely, importing dollar-priced goods becomes cheaper if the dollar is strong against the currencies of supplying countries. This balance reflects on local prices, especially in industrial and food sectors. The stability of the riyal against the dollar limits these effects on the local market, but significant shifts in the dollar's global value may gradually show their effects on the cost of living and commodity prices in Saudi Arabia.

The years 2024 and 2025 witnessed significant decisions by the US Federal Reserve regarding interest rates, as it halted rate hikes in mid-2024 at around 5.25% - 5.50%, then slightly lowered them later as inflation slowed. These movements contributed to the global stability of the dollar and positively affected capital flows towards emerging markets, including Saudi Arabia. Meanwhile, the Saudi Monetary Authority maintained alignment with the Federal Reserve's monetary policy to preserve the riyal's stability. These developments also led to greater clarity for local and international investors regarding financing costs and expected returns. In the current environment, the dollar continues to play a pivotal role in guiding economic policies within Saudi Arabia and the region.

The dollar indirectly affects inflation rates in Saudi Arabia. When the dollar is strong, imported goods become relatively cheaper compared to other currencies, helping to curb local inflation. Conversely, if the dollar weakens and import prices rise, inflationary pressures may increase. Due to the peg of the riyal to the dollar, the effects of dollar movements transition to the Saudi economy at a slower and less intense pace than countries with floating currencies. The Saudi Monetary Authority manages monetary policy cautiously to ensure inflation remains within targeted levels, benefiting from substantial dollar reserves and controlling interest rates. Recent data shows that inflation rates in Saudi Arabia remained moderate despite global price fluctuations in 2024-2025.

There are no official indications of an intention to change the peg of the riyal to the dollar in the near future, according to reports from the Saudi Monetary Authority and the International Monetary Fund. The continuation of the peg provides monetary stability and supports investor confidence, especially with the heavy reliance on dollar-priced oil. However, challenges such as economic diversification, fluctuations in global trade, and the rise of competing currencies like the Chinese yuan emerge. Any change in the peg policy would require a comprehensive study of its impact on economic growth, foreign investments, and financial stability. Some experts suggest that flexibility may be required in the future if global economic conditions change or strong alternatives to the dollar emerge in international trade. Until that moment, the peg to the dollar remains the safest strategic option for the Kingdom.

To monitor dollar movements and their effects on the Saudi market, it is advisable to consult reports from the Saudi Central Bank (SAMA), the International Monetary Fund, and the World Bank. Additionally, financial news agencies such as Bloomberg, Reuters, and the Financial Times provide updated analyses on global monetary policies and exchange rates. Saudi trading and economic news sites also offer accurate coverage of the dollar's impact on local stocks and companies. Furthermore, specialized educational platforms like Investopedia can help understand the basic concepts of monetary policies and currency markets. Relying on official and reliable sources ensures accurate data and objective analysis away from rumors or outdated information.