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Kuwait revalues currency, markets test Gulf pegs

Filed on July 25, 2007

KUWAIT/DUBAI - Kuwait allowed the dinar to appreciate around 1.7 percent against the tumbling dollar on Wednesday, encouraging investors to bet that other Gulf Arab oil producers would review their pegged exchange rates.

The dinar surged to an 18-year high while the Saudi Arabian riyal and the United Arab Emirates dirham strengthened as the magnitude of the Kuwait’s third revaluation in just over two months took markets by surprise.

“The markets are looking at which country would likely be next,” said Koceilas Maames, Africa and Middle East Economist at Calyon Credit Agricole in Paris.

The dinar will trade at 0.28200 per dollar with the central bank buying dollars at 0.28195 and selling them at 0.28205, the central bank said. The previous rate was 0.28690 per dollar.

The dirham was at 3.6716 to the dollar by 0930 GMT, strengthening more than 15 ticks from its level before the announcement. The Saudi riyal appreciated to 3.7495 from 3.7505/6.

The Saudi and UAE central banks could not be reached for comment on Wednesday.

Both countries, and their neighbours Bahrain, Qatar and Oman, have repeatedly ruled out any change in exchange rate policy. The five states and Kuwait agreed in 2003 to maintain pegs to the dollar to prepare for monetary union in 2010.

Oman views the dollar’s decline as “a passing phase”, Mohammed Nasser al-Jahadhmy, executive vice president at the Central Bank of Oman, told Reuters on Wednesday, ruling out a revaluation of the rial.

Oman raised the first questions about the timetable for monetary union last year when it opted not to join by 2010. Kuwait then plunged the project into crisis on May 20 when it dropped its dollar peg and adopted a basket of currencies, saying a weaker dollar was driving up inflation by making imports more expensive.

Lost ground

The currency of Kuwait, the Middle East’s fourth-largest oil exporter, has now appreciated around 2.5 percent since May 19.

“If you look at the scale of the dollar decline over the last year or so, the previous adjustments only got Kuwait back a small part of that ground that it had lost,” said Simon Williams, economist at HSBC in Dubai.

The dollar fell to a 2-1/2-month low against the yen on Wednesday on fears about US credit market turmoil and housing sector weakness. Earlier this week, it hit an all-time low against the euro and tumbled to a 15-year trough against a basket of six major currencies.

Kuwait’s central bank has refused to give the exact composition of its basket, saying only that it consisted of currencies the country uses for imports and investment, and that the dollar was a major component.

Before Wednesday’s move Standard Chartered had estimated the US currency accounted for around 70 percent of the basket.

“It means either that a dollar weight in the basket of 70 percent is too large, or they actually want the dinar to appreciate against major currencies because they are worried about inflationary pressures,” said Steve Brice, regional economist at Standard Chartered.

Inflation in Kuwait was 5.15 percent at the end of March, according to the latest available official data. Kuwait gets about 38 percent of imports from the euro zone, compared with 39 percent for UAE and 51 percent for Qatar, according to Calyon.

Kuwait newspapers carried a series of reports on Wednesday about the impact of the dollar’s decline on imported inflation.

“Citizens of Gulf and OPEC countries suffer a loss of purchasing power,” read the headline of al-Qabas newspaper’s main economic story, which focused on dollar weakness.

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