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Suppose Saudi Arabia wishes to peg the Saudi Riyal to the US dollar at $0.25/Riyal. But,...

Suppose Saudi Arabia wishes to peg the Saudi Riyal to the US dollar at $0.25/Riyal. But, because of foreign funds flowing into SA, the Riyal appreciates. How can the Saudi Arabian Monetary Authority (Saudi’s central bank) maintain the pegged exchange rate? Is the Saudi central bank limited by its foreign exchange holdings in maintaining the peg?

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Answer #1

To maintain the Peg at a given rate the Saudi monetary authority has to decrease the supply of Dollar in the market, they can do this by buying the excess dollar and floating more Saudi riyals in the market, this will increase the Saudi reserve of dollar.

No, by limiting the foreign exchange holding the Saudi's cannot maintain the peg, the reserves will be increasing.

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