Kuwait drops dollar peg, adopts currency basket

KUWAIT - Kuwait switched the dinar’s exchange rate mechanism to a basket of currencies on Sunday, dropping a peg to the tumbling US dollar that was adopted in 2003 and throwing into disarray plans for a single currency in the Gulf Arab region.

By (Reuters)

Published: Sun 20 May 2007, 6:41 PM

Last updated: Sat 4 Apr 2015, 11:06 PM

Kuwait was still committed to the monetary union, the central bank governor said in a statement, but the dollar’s slide over the past two years had forced it to break ranks with fellow Gulf oil producers to contain inflation.

“The massive decline in the dollar’s exchange rate against main currencies ... has contributed to the increase in local inflation rates and this step is part of the central bank’s efforts to curb inflationary pressure,” Sheikh Salem Abdul-Aziz al Sabah said in a statement carried by state news agency KUNA.

“Until the completion of all the requirements to achieve the currency union and the launch of the Gulf currency, the central bank of Kuwait will continue to adopt the basket system.”

Analysts said the shock move plunged the monetary union project into crisis.

“We didn’t think the single currency was likely, at least by the 2010 deadline, and we are getting less convinced that it is going to happen at all. This move reduces even further the likelihood.” said Steve Brice, chief middle east economist at Standard Chartered Bank in Dubai.

Oman and Bahrain said they would maintain pegs to the dollar. The central bank of Qatar, the United Arab Emirates and Saudi Arabia, were not immediately available for comment.

Kuwait’s currency came under intense pressure early this year from speculators betting the central bank would allow it to appreciate against the dollar to curb inflation and soak up some of the cash pouring into the oil exporter’s economy.

Kuwait, which was named as the top candidate for a revaluation in a Reuters poll of analysts in March, has blamed rising inflation on the falling dollar, which tumbled to a record low against the euro in April.

At the end of the first quarter inflation stood at 5.15 percent, the ministry of planning said a week ago.

“The speed of the switch to the basket has surprised some but the direction of change is in line with expectations. It’s been clear for some time that Kuwait wants a stronger dinar and a more flexible regime,”Simon Williams, economist at HSBC in Dubai.

In March Kuwait’s central bank warned speculators against betting on an appreciation of the dinar and followed up by cutting key interest rates to make dinar-denominated assets less attractive.

Gulf currencies were unchanged after Kuwait’s move because global foreign exchange markets were closed on Sunday, one Dubai-based trader said.

Foreign dealers accounted for around 75 percent of market activity, the trader said.

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