Trade-weighting the Saudi riyal: “outperforming” the dollar, even though it’s pegged

Trade-weighted exchange rates allow economists to strip away the effect of the outsized strength of the dollar in global currency markets, gaining a more holistic perspective on an economy's interdependence with major trading partners. Saudi Arabia is an interesting case, given it pegs its currency to the greenback (at 3.75 to the USD) and prices its main export in dollars.

Every month, the Bank for International Settlements calculates such a trade-weighted measure, known as NEER (the nominal effective exchange rate) for different countries. CEIC users can get a timely edge: we calculate NEER daily for Saudi Arabia.

The dollar began rising against most of its global counterparts in 2022, when the Federal Reserve began its tightening cycle. As our chart shows, this is roughly when NEER for the two countries started diverging; the gap grew especially wide during 2023, though it has narrowed a bit recently.

In NEER terms, the riyal (in purple) has appreciated more strongly than the dollar has (in green).

This is a result of the differences in the relative importance of trading relationships. The US accounts for 11.2% of the trade-weighted currency basket for Saudi Arabia's NEER, as calculated by the BIS. But Saudi Arabia accounts for only 0.4% of the US basket. Meanwhile, Canada and Mexico account for a quarter of the US basket, but only about 1% for that of Saudi Arabia.

Click here for CEIC's dashboard on trade-weighted exchange rates. (Israel, Saudi Arabia, Morocco and the UAE are among the most recently added economies.)

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