Kuwait dinar jumps as dollar slide tests Gulf pegs

Filed on November 21, 2007

DUBAI - Kuwait let the dinar make its second-biggest daily gain on Wednesday since the oil exporter dropped the dollar peg in May, as the U.S. currency’s global slide raised pressure on Gulf neighbours to follow its lead.

The dollar-pegged United Arab Emirates dirham hit a new five-year high and forward rates showed investors betting on appreciations of 3.1 percent in the dirham and 2.7 percent in the Saudi riyal in a year.

“The pressure is rising for other Gulf countries to follow Kuwait,” said Abdul-Wahab Issa al-Rushood, treasurer at Kuwait Finance House. “I’m not surprised that the dinar has risen, given the dollar’s weakness.”

Kuwait, the Middle East’s fourth-largest oil exporter, allowed the dinar to gain 0.56 percent versus the dollar, which fell to a record low against the euro on Wednesday.

The dinar has risen 5.35 percent since May 19, a day before the central bank adopted a basket of currencies, saying the dollar’s weakness was driving up inflation by making some imports more expensive.

Kuwait gets about a third of its imports from western Europe, as does the UAE which said last week it could track a basket of currencies in concert with Saudi Arabia and three other oil producers preparing for monetary union as early as 2010.

Nine-month forward rates widened to 2.1 percent for the riyal and 2.6 percent for the dirham.

“The fundamental reasons for a revaluation are so strong that some sort of change in currency regimes is inevitable,” Citigroup Global Markets Ltd said in a note.

Inflation has accelerated to decade-highs across the Gulf as a near fivefold rise in oil prices since 2002 fuels economic growth.

Dollar pegs force Gulf central banks to track U.S. monetary policy to maintain the relative value of their currencies at a time when the Federal Reserve is cutting interest rates.

Growing expectations of a Gulf shift away from the dollar have weighed on the U.S. currency, partly because it could signal diminishing demand for U.S. assets in a region where central banks and state funds control $1.2 trillion.

The Saudi riyal touched a 21-year high of 3.7050 on Monday after a source familiar with Saudi policy told Reuters on Friday that Riyadh could consider a revaluation to keep monetary union plans alive.

The world’s largest oil exporter, which has fixed its riyal at 3.75 per dollar since June 1986, may be considering a revaluation to help bridge a divide with neighbours worried about pegs to the dollar, al-Riyadh newspaper reported on Tuesday.

The dirham touched 3.6675 per dollar, its strongest since November 2002. The central bank has fixed the dirham at 3.6725 per dollar since 1997.

Bids on the Qatar riyal were steady at a five-year high of 3.6320 at 0755 GMT. Inflation in Qatar hit a record 15 percent earlier this year.

The UAE and Qatar could move unilaterally to revalue their currencies before the end of the year, Rushood said.

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