Mutual interest in Dollar’s best position

U. S major exports are related with Saudi Arabia. The contribution of the U. S states for exports to Saudi are, Washington State ($6 bil), Texas, New York, California, and Michigan ($3-4 bil), and DC, New Jersey, Virginia, and Illinois ($1-2 bil) with more than $12 bil came from the other U. S. states in 2003. (Saudi-American forum). The experience of Washington State provides a good case study on the importance of exports to Saudi Arabia for local employment. In 1998, the state's exports to the Kingdom peaked at $2.2 billion (reflecting commercial aircraft sales by Boeing to the Saudi Arabian Airlines).

By 2000, exports had dropped by $1. 4 bil to only $0. 8 billion. From 1998-2000, total Washington exports fell from $37. 9 bil to $33. 3 bil, or by $4. 6 billion, in which one third were accounted to Saudi Arabia imports. This, according to Washington State Staff Economist, David Wallace, created an employment loss in Saudi the state lost a total of 36,600 industrial sector jobs. Also according to economists' rule that Saudi’s 10-15,000 jobs are associated with every $1 billion per year of U. S. ?

Despite its terrorist attacks and allies, Saudi Arabia's currency and oil price constantly roam around the U. S. dollar despite its weak valuation at several times. The Saudi riyal has been constantly pegged at 3. 75 riyals to the US dollar since 1986. The peg was introduced to stabilize the internal and external value of the currency. Saudi keeps the value of Dollar in interest to make good transaction in the international market. A strong dollar value creates a good value to the companies in the stock market, inviting more dollars into the country.

Saudi has nearly $400 billion to $500 billion tied up in the U. S. currency, which is the best reason for Saudi to aspire for the best value of dollar. As the weak valuation of Dollar poses a problem of inflation, Saudi constantly pegs its Riyal to dollar. Also the costs of changing the exchange rate can outweigh the probable benefits that could seem from the raise of Riyal. The imported inflation is an insignificant part of the current inflation chapters for Saudi Arabia. The main reasons for Saudi in seeking the best value of U. S dollar are as follows: To the government of Saudi,  the best value of dollar earns cash inflows.

The oil exports are paid in dollars and converted into riyals for budgetary spending. IF the dollar value is reduced then the budget for internal expenditure would be insufficient raising a budget surplus. The dollar denominated assets of Saudi’s foreign assets value in excess of $240 billion, which otherwise loose their value if the dollar value is brought down. The Central Bank (SAMA)’s credibility is dependent ont eh best value of Dollar as SAMA keeps assuring of the 21-year old exchange rate peg. The credibility and confidence issues are tied up with the best value of dollar.

Foreign investors: In order to keep the best interest of foreign investors, the riyal should maintain its lower trading rate with dollar. A sudden change in the exchange rate and the more expensive riyal would discourage foreign investment, which otherwise paralyze many  major policy initiative. Local companies: In order to keep local products at less production cost level and to make them more price competitive in the foreign markets, Saudi seeks the best dollar value. So Saudi keeps a stable exchange rate by constant pegging of Riyal to Dollar. ?

Common Currency There is a plan to issue united currency with all the Arab gulf countries including Saudi. This would be something like Euro to trade with the rest of the world. Suadi being the major player among the six GCC states, who would own this currency operation, any movement linked with key diplomatic issues. To the Gulf States, the single currency introduction can benefit many economic gains for the Gulf States. The primary benefit would be that the GCC states may no longer need to reserve the foreign stock in large amounts to trade with others.

Each country can lessen the efforts to support its own currency. Pooling offers the effort reduction and gain in strength to the currency. Though the new currency comes into existence from 2013, it becomes necessary for the GCC states to reserve the foreign currency to do the foreign trade with other countries till they become comfortable with new currency floating. But once the GCC states attains economic growth with new currency time for dependency on other foreign currency reserves will be reduced.