Saudi Riyal – USD Trading

Saudi Riyal (SAR) to USD trading involves the exchange of Saudi Arabian Riyals for US Dollars in the foreign exchange (forex) market. This is one of the more stable currency pairs in the world, due to Saudi Arabia’s economic structure and the riyal´s fixed peg to the US dollar at 1 USD = 3.75 SAR.

Forex traders don’t typically focus on the SAR/USD pair for speculative purposes because of its fixed nature. Instead, the pair is used by businesses, exporters, and investors looking for stability rather than volatility. Forward contracts and currency swaps involving SAR and USD are often used by companies and institutions for hedging purposes, particularly in industries tied to the oil market.

Fixed Exchange Rate

Since 1986, the Saudi Riyal has been pegged to the US Dollar at a fixed rate of 3.75 SAR per 1 USD. This means that the Saudi government, through its central bank (SAMA – Saudi Arabian Monetary Authority), actively maintains this rate to stabilize its economy, which is largely dependent on oil exports priced in US dollars. The peg provides predictability and shields the economy from significant currency fluctuations that could arise from volatile oil prices or shifts in global financial markets.

Why the Peg?

• Oil Exports
  Saudi Arabia is one of the world’s largest oil exporters, and since oil is globally traded in US dollars, the fixed exchange rate helps ensure a stable income stream for the country. It also simplifies the process for businesses involved in international trade.
• Economic Stability
  The fixed rate provides economic stability, limiting the impact of currency fluctuations on imports and exports. This is important because the Saudi economy heavily relies on imported goods, which are priced in USD.
• Inflation Control
  A stable exchange rate helps Saudi Arabia manage inflation by avoiding wild currency swings that could increase the cost of imports.

Trading SAR/USD

Despite the peg, the SAR/USD pair can still experience small fluctuations within a narrow range. These fluctuations are often the result of changes in liquidity or market demand, but they typically remain tightly controlled by SAMA’s intervention in the forex markets.

Since the exchange rate is controlled, speculative trading in SAR/USD is limited. Most trades involving the Saudi Riyal are conducted for business transactions, foreign exchange needs by individuals or companies, or institutional hedging in oil-related sectors.

Forex brokers will often provide access to the SAR/USD pair, though spreads may be tighter and trade volumes lower compared to more volatile pairs like EUR/USD or GBP/USD.

Key Influencers in SAR/USD Trading

• Oil Prices
  Although the SAR/USD peg remains fixed, fluctuations in oil prices can impact market sentiment and liquidity in the pair. A significant drop in oil prices can raise questions about Saudi Arabia’s ability to maintain the peg, though the country has significant foreign exchange reserves to defend the peg in the short to medium term.
• Saudi Monetary Policy
  The Saudi Arabian Monetary Authority (SAMA) plays an active role in managing the Saudi economy and ensuring that the peg remains intact. This includes adjusting interest rates in line with the US Federal Reserve to maintain parity between the currencies.
• US Federal Reserve Policy
  Changes in US interest rates and monetary policy from the Federal Reserve can indirectly affect the Riyal, especially if they influence the price of oil or global liquidity conditions.

The future of SAR/USD

Trading SAR/USD is different from typical forex pairs due to the Riyal’s fixed peg to the US Dollar. This pair offers stability rather than volatility, making it more relevant for business transactions or hedging purposes than for speculative trading. While this pair doesn’t see much movement in the spot market, factors like oil prices and US monetary policy can indirectly influence its broader market context.

It is possible that we will see changes in the future that will impact this situation. Among other things, the Cooperation Council for the Arab States of the Gulf (GCC) – of which Saudi Arabia is a member – has proposed the establishment of a monetary union with a single currency for all GCC membership countries. At the time of writing, all GCC countries still have their own currencies.

Back in 2001, the GCC Supreme Council set three ambitious goals: Customs Union by January 2003, Common Market by 2007, and Common Currency by 2010. In December 2006, Oman announced that they would not be able to meet the target date for the common currency. In May 2009, the United Arab Emirates (UAE) withdrew from the project, as the Supreme Council had announced that the central bank for the monetary union would be located in Riyadh, Saudi Arabia and not in UAE.

If the monetary union actually becomes a reality, and all GCC countries become members of the union, it would be the second-largest supranational monetary union in the world as meassured by the GPD of the common-currency area.

Khaleeji, which means “of the Gulf” in Arabic, was proposed as a name for the new currency, but this suggestion was turned down by the GCC in late 2009 and no other official name has been agreed on.

So, if a common currency for the GCC was to become a reality, would it have any ties to the USD? It is of course impossible to know beforehand, but senior figures in the GCC administration have stated that the new currency could be linked to the US Dollar, or to a basket of important currencies – and in such as basket, the USD would have a big share.

Note: Saudi Arabia is not the only country in the region with a currency pegged to the USD; the United Arab Emirates (UAE), Qatar, Oman, and Bahrain also have their respective currencies pegged to the USD. It should also be noted that Kuwait´s Dinar is pegged to a basked of currencies which includes the USD.