USD Currency in the Saudi Financial Market and Its Economic Impact

The US dollar (USD) is the most traded and held currency globally and serves as a key benchmark for pricing most strategic commodities such as oil and gas. In Saudi Arabia, the US dollar represents the primary link between the local economy and global markets, as Saudi oil is priced and exported in dollars. The government and Saudi banks rely on the dollar as a primary reserve currency, enhancing the stability of the local economy. Additionally, Saudi investors and institutions depend on the dollar for their foreign transactions, making the stability and strength of the dollar directly influential on capital flows, the government budget, and the performance of various economic sectors within the Kingdom.

The exchange rate of the Saudi riyal against the US dollar has been characterized by stability for decades, officially pegged at around 3.75 riyals per dollar. This peg provides monetary and economic stability for the Kingdom and limits exchange rate fluctuations that could affect oil revenues or import costs. In the parallel market, slight differences of no more than ±1% may appear, but they quickly revert to the official level thanks to interventions from the Saudi Arabian Monetary Authority. The stability of the peg contributes to enhancing foreign investor confidence and reduces currency fluctuation risks for Saudi companies dealing in dollars for their exports or imports.

The Saudi Arabian Monetary Authority holds substantial foreign currency reserves, with the US dollar constituting the largest share (60-70%). By the end of 2023, the Kingdom's total reserves reached approximately $728 billion, supported by rising oil revenues. These reserves are distributed among US deposits, bonds, and other dollar-denominated international assets, enhancing the Kingdom's ability to withstand global financial crises and currency fluctuations. This large reserve base ensures the stability of the currency peg and supports the state's financial policies, especially amid rapid changes in the international economy.

The strength of the US dollar is influenced by several key economic factors in the United States, primarily interest rates, inflation, and economic growth. In 2024, US inflation rates stabilized around 3-4%, while the Federal Reserve maintained historically high interest rates (5-5.25%). This made the dollar more attractive to global investors and raised the dollar index against other currencies. Consequently, the strength of the dollar reflects on the Saudi economy through increased reserve values, improved oil revenues, and sometimes higher international borrowing costs for Saudi companies. Dollar movements also affect the prices of imported goods and the cost of living within the Kingdom.

The US dollar forms the backbone of the foreign exchange (forex) market, accounting for approximately 85-90% of all global bilateral trades. The dollar maintains its dominance against major currencies such as the euro, Japanese yen, British pound, and Chinese yuan. Most international trade contracts, especially for oil and gas, are still denominated in dollars, solidifying its position as a global reference currency. Competition from other currencies like the euro or yuan remains limited, and the dollar continues to be the primary choice for international reserves and major financial settlements, including in Saudi Arabia.

The dollar price indirectly affects most Saudi economic sectors. In the oil sector, a rising dollar enhances the value of revenues collected in riyals, while in the import sector, a stronger dollar increases the cost of imported goods, potentially raising inflation rates. The financial and banking sector benefits from the dollar's strength through increased values of foreign assets, but it may be negatively impacted if borrowing costs in dollars rise. On the other hand, Saudi companies reliant on exports or international investments closely monitor dollar movements, as they affect profitability and competitiveness in the global market.

Although the dollar is not a stock listed in the Saudi market, the performance of many major companies, particularly Saudi Aramco (2222), is closely linked to dollar movements. A rising dollar supports the profits of oil and petrochemical companies, as their products are sold in dollars. Additionally, the banking and investment sector benefits from the increased value of dollar-denominated assets. Conversely, importing companies or those dependent on foreign raw materials may be adversely affected by a stronger dollar, as it raises production and operational costs. Therefore, monitoring dollar movements remains essential for analysts and investors in the Saudi financial market.

Despite the dollar's dominance in global markets, there are major currencies and competitors seeking to increase their share. The euro is the second-largest reserve currency but faces economic and political challenges within the European Union. The Chinese yuan is slowly advancing as an international currency, especially after its inclusion in the International Monetary Fund's Special Drawing Rights basket, but its full liberalization remains limited. Gold is considered a safe haven in times of instability, while dollar-backed digital currencies (stablecoins) are emerging as a technical alternative, though their impact on the Saudi market remains marginal. In the Gulf region, most local currencies are pegged to the dollar, reducing direct regional competition.

In recent years, the Saudi Arabian Monetary Authority has continued to support the currency peg between the riyal and the dollar, enhancing liquidity and stability in the markets. The Kingdom has also launched several initiatives to strengthen financial cooperation with the United States and expand the use of the riyal and dollar in bilateral trade exchanges. Fluctuations in oil prices in 2024 reflected on dollar reserves, but the cautious policy of the Monetary Authority maintained stability. In the digital realm, experiments on Central Bank Digital Currencies (CBDC) have been launched, which may change the nature of transactions in the future, without directly impacting the current status of the dollar.

The Federal Reserve's increase in interest rates directly affects monetary policies in Saudi Arabia due to the peg with the dollar. When interest rates rise in the US, the Saudi Monetary Authority often follows this increase to maintain exchange rate stability and attract investments. This leads to higher borrowing costs domestically and internationally, affecting demand for Saudi bonds and stocks. Conversely, higher interest rates enhance returns on Saudi reserves invested in US debt instruments, supporting the government budget and the financial sector.

Most imported goods in Saudi Arabia, such as cars, electronics, and foodstuffs, are priced directly or indirectly in dollars. When the dollar strengthens against other currencies, the cost of these goods in riyals rises, potentially leading to increased local inflation rates. The stability of the currency peg between the riyal and the dollar reduces price fluctuation risks, but it does not prevent the global dollar movements from impacting local prices. Therefore, government entities closely monitor dollar developments to ensure price stability and support citizens' purchasing power.

The dollar is expected to continue playing a pivotal role in the Saudi economy in the medium to long term. The ongoing currency peg enhances the stability of the local currency and attracts foreign investments. Despite the emergence of new competitors and technological innovations in the currency realm, the dollar will remain the primary currency for reserves and international transactions for the Kingdom. Any significant change in this policy will undergo careful study and coordination with international partners to ensure that sudden fluctuations or negative impacts on the national economy do not occur.

To follow USD news and its impact on the Saudi market, it is advisable to refer to publications from the Saudi Arabian Monetary Authority, reports from the Ministry of Finance, and data from global central banks (especially the US Federal Reserve). Economic news agencies (Reuters, Bloomberg) also provide instant analyses and real-time indicators. Forex trading platforms and smartphone applications allow for real-time tracking of dollar movements and exchange rates. It is always important to rely on official and trustworthy sources to form an accurate picture of economic developments.

In recent years, the importance of digital currencies and stablecoins (dollar-backed) has increased as alternative financial tools. Despite the rapid growth of these technologies globally, their impacts on the Saudi economy remain limited due to strict regulations and significant reliance on the dollar for international transactions. However, some Saudi banks have begun to offer dollar-denominated investment tools, and the Kingdom, through its digital riyal initiatives, aims to develop an advanced financial system that supports innovation and stability simultaneously. In the medium term, digital currencies are expected to remain complementary to the dollar rather than a replacement in the Saudi market.