USD in the Saudi Financial Market: Comprehensive Analysis 2024-2025

The US dollar (USD) is the official currency of the United States and is considered the world's primary reserve currency. In the Saudi context, the dollar is pivotal due to oil pricing in dollars and the reliance on it for most international transactions. Since 1986, the Saudi riyal has been pegged to the dollar at a fixed exchange rate of 3.75 riyals per dollar, overseen by the Saudi central bank (SAMA). This peg provides stability in inflation rates for the Saudi economy and contributes to the stability of import and export prices. In the Saudi stock market (Tadawul), there is no investment instrument that directly reflects the dollar, but its impact is evident in the profits of listed companies, especially those linked to oil and the industrial sector. Investors and institutions rely on tracking dollar indicators to assess risks and investment opportunities, and the dollar's impact is reflected in reports from the Capital Market Authority (CMA) as part of monetary and economic stability factors.

The Saudi central bank maintains a fixed exchange rate between the Saudi riyal and the US dollar at 3.75 riyals per dollar. This peg has not seen significant changes over the past decades and is expected to continue during 2024-2025, as confirmed by reports from the Capital Market Authority. The stability in the official exchange rate reflects the strength of the Kingdom's foreign reserves and reduces the risks of currency fluctuations on the local economy. In financial and banking markets, actual prices in foreign exchange trading and bank transfers closely approach this official rate, providing a stable monetary environment for companies and investors. Most international transactions in foreign currencies in Saudi Arabia are conducted in dollars, with estimates indicating that 70% of external transactions are dollar-denominated. This peg facilitates the pricing of imported goods and provides companies with clearer financial planning, relying on the Saudi central bank's policies to maintain this equation.

Companies listed in the Saudi financial market are indirectly affected by fluctuations in the US dollar, especially those operating in exporting sectors such as oil and petrochemicals. For instance, Saudi Aramco prices its exports in dollars, making any change in the dollar's strength impact its revenues. When the dollar is strong, the value of revenues generated from oil exports and most other goods priced in dollars increases. Additionally, companies that rely on importing raw materials or equipment from abroad benefit from stable exchange rates, reducing the risks of cost fluctuations. Conversely, companies with dollar-denominated obligations or financing may be negatively affected if US interest rates rise, increasing borrowing costs. Saudi investment institutions are keen to monitor dollar performance reports and global market indicators to assess risks related to investments in dollar-linked sectors.

The USD is the most traded currency in the global foreign exchange market (Forex) and is central to most international transactions. In Saudi Arabia, the stability of the riyal's exchange rate against the dollar allows investors and companies flexibility in foreign dealings. However, Saudi institutions monitor the dollar's performance against other major currencies such as the euro, yen, and Chinese yuan, as any significant change in the dollar reflects on the prices of imported goods and operational costs. In 2024, the DXY dollar index reached around 105 points in March, before declining to 100 points by the end of the year due to expectations of US interest rate cuts. Some Saudi financial institutions provide tools to hedge against dollar fluctuations, such as international certificates or foreign currency investment funds. Reports from brokerage firms also help educate investors about Forex market developments and their impact on the local market.

Global oil contracts are priced in US dollars, establishing a close relationship between the dollar and oil prices. When the dollar strengthens against other currencies, oil becomes more expensive for foreign importers, potentially leading to reduced global demand and affecting prices. Conversely, a weaker dollar boosts global demand for oil and increases revenues for exporting countries like Saudi Arabia. For the Kingdom, rising oil prices in dollars lead to increased government revenues and profits for listed companies operating in the oil and gas sector. Saudi regulatory authorities closely monitor developments in the dollar and oil prices to assess their impact on the local economy and liquidity in the financial market.

The Saudi Arabian Monetary Authority (SAMA) plays a fundamental role in managing the peg between the riyal and the dollar and maintaining exchange rate stability. SAMA manages foreign reserves, monitors foreign currency flows, and adjusts local interest rates in line with US Federal Reserve policies. When the US Federal Reserve raises interest rates, SAMA raises the local discount rate to ensure the continued attractiveness of the Saudi riyal, contributing to the maintenance of monetary linkage. SAMA also issues periodic data on the volume of foreign reserves denominated in dollars, clarifying the Kingdom's ability to withstand any global fluctuations. This stability instills confidence in local and foreign investors in the Saudi market and mitigates risks associated with currency changes.

The US dollar indirectly affects inflation rates in Saudi Arabia through the stability of import prices, as most trade bills are settled in dollars. During periods of dollar strength, the prices of imported goods remain stable or relatively low for the Saudi consumer, limiting inflationary pressures. Conversely, if the dollar weakens, the Kingdom may face rising prices for some imported goods from countries not linked to the dollar. In 2024, US inflation recorded 3.4%, while Saudi Arabia maintained moderate inflation levels between 2-3% thanks to exchange rate stability and SAMA's policies. Official authorities also monitor global and local inflation indicators to assess the future impact of any changes in the dollar's strength.

The US Dollar Index (DXY) serves as a fundamental reference for measuring the dollar's performance against a basket of major currencies, including the euro, yen, and British pound. A rising DXY indicates the dollar's strength globally, which reflects on the prices of dollar-denominated commodities such as oil and gold. For Saudi investors, tracking the DXY index provides important signals about global market trends and is used as a tool to assess currency hedging risks or invest in dollar-denominated international instruments. In 2024, the index experienced fluctuations between 105 and 100 points, influenced by US interest rate policies and geopolitical crises. Investors are advised to review market reports and monitor the DXY as part of financial analysis tools to estimate risks associated with dollar fluctuations.

Despite the Saudi riyal's peg to the dollar, there are major currencies competing with the dollar in global markets, such as the euro (EUR), Chinese yuan (CNY), and gold (XAU/USD). The dollar's performance is affected by changes in these currencies, especially with the expansion of Saudi trade relations with Europe and China. For example, any decline in the euro increases the dollar's strength, impacting the cost of Saudi imports from the European Union. The Chinese yuan also has a significant impact given the growing trade exchange between Saudi Arabia and China. Additionally, gold is considered a traditional safe haven during periods of dollar weakness, leading some Saudi investors to hedge through gold or related instruments. Nevertheless, the dollar remains the reference currency in the Saudi market due to the fixed peg system and stable monetary policies.

The period of 2024-2025 witnessed several global developments that indirectly affected the dollar and the Saudi market. Among the most notable developments was the continued US Federal Reserve's maintenance of high interest rates (5.25–5.50%) to address inflation, with expectations for cuts in late 2024. Geopolitical crises, such as the war in Ukraine and tensions in the Middle East, also influenced global demand for the dollar as a safe haven. Additionally, the Kingdom continued to issue dollar-denominated international bonds, enhancing foreign investors' confidence in the Saudi economy. On the local development front, Saudi Arabia continued to implement Vision 2030 programs, with steps taken to diversify government reserves and international investments. All these factors highlight the importance of monitoring economic and financial news to understand the dynamics of the dollar and its impact on the Saudi market.

The Saudi financial market does not allow for direct trading of the dollar, but there are investment tools that provide exposure to the dollar, such as sukuk and dollar-denominated international bonds, as well as global investment funds. These tools enable Saudi investors to benefit from dollar movements in global markets or hedge against currency fluctuations. Some local banks also offer investment services in international deposit certificates or foreign currency funds. Nevertheless, investment tools linked to the dollar are less common compared to local stocks, and investors are advised to review available investment products and ensure they understand the risks associated with dollar movements before making any decisions.

It is important for investors and followers of the Saudi financial market to monitor several indicators when analyzing the performance of the US dollar, including US interest rate policies, developments in the US and global economies, inflation indicators, oil prices, and geopolitical crises. It is also advisable to follow data from the Saudi Arabian Monetary Authority and foreign reserve data, in addition to reports from the Capital Market Authority regarding monetary developments. Monitoring indicators such as the DXY and the performance of competing currencies (euro, yuan, gold) provides investors with a broader picture of risks and opportunities. Finally, reliance on official and reliable sources for data analysis is crucial, avoiding decisions based on unsupported forecasts or rumors.