Is Saudi About to Ditch the Dollar?

There are reports that a 1974 agreement between the US and Saudi Arabia requiring the Kingdom to trade oil exclusively in USD, and reinvest surpluses in US Treasuries, is about to expire without renewal. It’s not clear such an agreement actually exists. The actual history of Saudi holdings of US Treasuries is not consistent with such an agreement. Saudi has been threatening the Biden administration with abrogating USD-exclusivity for two years, will Biden has vilified the Saudi crown prince and accommodated Iran. After the October 2023 Hamas attacks, Biden has reversed course and is working with Saudi on military assistance. Even Saudi’s total abandonment of USD-based trade would be a drop in the bucket in the context of total USD trade. USD remains the most reliable and stable currency. Reports that China is developing a gold-backed RMB appear to be baseless. Such backing would have to include exchange-rate fixity and the market’s belief that a communist dictatorship would honor it.  Without that, RMB cannot compete with USD as a store of value, which is the important dimension of USD dominance, far outweighing USD’s transaction role.