A man walks past a money exchange shop at Central
Saudi Arabia’s accepting yuan payments for oil sold to China is more symbolic than a true threat to dollar currency strategists say. Image Credit: AP

Dubai: Saudi Arabia’s accepting yuan payments for oil sold to China is more symbolic than a true threat to dollar currency strategists say.

The world’s largest crude exporter, which has been in talks with China over yuan-priced contracts for six years, has sped up the negotiations, the Wall Street Journal reported Tuesday. The offshore yuan erased earlier losses after the report, yet investors from Nordea Investment Management to Generali Insurance Asset Management said it changes little for the dollar’s status as the world’s reserve currency.

“I don’t know if it is really real,” said Guillaume Tresca, a senior emerging-market strategist at Generali in Paris. “It happens at a moment when the geopolitical order is moving. The dollar has long been the default currency for pricing energy contracts around the world, elevating the importance of the greenback and bolstering Washington’s geopolitical influence. Yet with US and allied sanctions on Russia restricting payments in dollars and cutting that nation off from half of its foreign reserves, other nations are reconsidering their relationships with the currency.

Peg factor

The riyal is pegged to the dollar, so any potential weakness in the US. currency would ricochet back to the kingdom. The peg has shielded the nation from price volatility and allowed its central bank to accumulate reserves. Some investors are skeptical the country will pivot away from that tool as a result.

Still, China has made the internationalization of the yuan a top priority. And countries including Russia, India and Saudi Arabia have sought to include non-dollar payments in their financial systems to reduce their dependence on the US. This year’s sanctions on Russia, and the potential economic devastation stemming from its isolation, have brought a new sense of urgency among those countries, according to some strategists.

“It is possible that those that trade with Russia are looking for some contingency plans should the sanctions extend to all payments, especially as India or Saudi Arabia won’t have the same level of coordination with the US. that the European Union or the UK would have,” said Kaan Nazli, a money manager at Neuberger Berman in The Hague, Netherlands.

Limited impact on dollar

Most investors expect such attempts to abandon the dollar will be minor. Over time, however, they could lead to an alternative financial system that captures a limited market share, while still leaving the dollar as the world’s dominant currency.

“Several years down the road, we might see two parallel financial systems globally, but this move by Saudi Arabia alone is not the watershed moment to get there,” said Matthew Weller, global head of research at Forex.com. “This is not the game changer.”