The yuan spiked in value on Tuesday following reports that Saudi Arabia is considering accepting the currency in some Chinese oil deals.
The dollar is widely considered the preeminent global currency due to oil typically being priced in the American currency.
According to a report from the Wall Street Journal, “talks between Riyadh and Beijing have accelerated as the Saudi unhappiness grows with Washington.”
“The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom,” WSJ reports. “The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.”
Saudi Arabia currently exports more than 25 percent of its oil to China.
Oil from Saudi Arabia has been exclusively priced in dollars since the 70s as part of a defense deal with the Nixon administration.
“China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion,” the report explained.
The possibility of the shift has already helped boost the struggling yuan’s value.
Yahoo Finance reports, “the offshore yuan climbed as much as 0.1% to 6.3867 per dollar, close to the session peak it reached during Asian trading. The currency had weakened as much as 0.3% in U.S. trading before the report on Saudi Arabia.”
“The bump for the yuan comes at a time when Chinese assets more broadly have been under some strain. The renminbi has come under tremendous selling pressure over the past couple days amid a rout in the country’s stocks. The offshore yuan fell more than 1.1% against the dollar in the three days through March 14, its worst such drop in a year. The offshore yuan’s 200-day moving average at 6.4116 per dollar remains key near-term support for the currency,” the report added.