I’d like to understand the benefit of pegging Saudi riyals to the U.S. dollar. I understand this was part of an agreement between Saudi and the US in the 80s’ and mostly in relation to oil and the on selling of oil globally but I don’t understand why this is beneficial to the U.S.
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Well there are two parts to it.
1. Generally when a country exports a resource, other countries have to pay in the local currency of the exporting nation. This creates a demand for the currency globally and hence increases its value in relation to other currencies.
2. In the 80, with the collapse of USSR imminent, the US emerged as the sole global power and convinced the Middle Eastern nations about its ability to guarantee safety and peace to these nations from domestic and foreign threats. In return the oil producing countries agreed to trade in USD only for selling oil.
3. The Middle Eastern countries thus benefit from pegging to USD since their local natural resource uplifts the USD and subsequently their currency and economy.
The main benefactor of this is US which managed to squeeze itself into the profits of the fortunate oil producing countries.
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