There are some Saudis, and some Islamists of other nationalities, who believe that the KSA should break its link with the US Dollar in order to a) show its independence or b) strike a blow against the US. Some think, too, that the Saudi government should start denominating oil sales in Euros rather than Dollars. Others more pragmatically note that because the Riyal is pegged to the dollar, when the Dollar drops, so does the value of the Riyal.

This piece in Asharq Alawsat, citing a report from an investment group, says it’s not likely to happen and explains why.

The Riyal’s Peg to the Dollar

London, Asharq Al-Awsat- The following report provided by Jadwa Investment looks at why the Saudi riyal’s peg to the US dollar will remain unchanged until 2010′ and how the kingdom will ride out the latest spell of dollar weakness and maintain the riyal’s exchange rate against the US currency during that time period:

There is a growing popular view that it is time to revalue (adjust upward) the Saudi riyal and possibly to follow Kuwait’s lead and end the currency peg to the US dollar. A weak dollar is being blamed for rising inflation and has made summer vacations more expensive. On top of this, oil prices are near all-time highs and the economy is booming, putting natural pressure on the riyal to strengthen. In our view however, the costs of changing the exchange rate far outweigh the benefits, particularly as imported inflation is an insignificant part of the current inflation story in Saudi Arabia. The main losers from a revaluation of the riyal would be:

The government: Oil revenues are earned in dollars and converted into riyals for budgetary spending. A revaluation would permanently impair the riyal value of oil revenues, reducing the size of the current budget surplus and accelerating the day when the budget falls into deficit. The value of the government’s mostly dollar-denominated foreign assets, currently in excess of $240 billion, when converted into riyals would also be cut.

The Central Bank (SAMA): SAMA has stated repeatedly and forcefully that there would be no change to the 21-year old exchange rate peg. Any move would therefore damage SAMA’s credibility and reduce confidence in the currency in the event of an oil price downturn or increase in the value of the dollar. Moreover, no central bank wants a sudden and sharp adjustment to the exchange rate, but small changes would have little impact on those hit by dollar weakness.
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