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11-25-2007, 05:30 PM
Kuwait dinar jumps as dollar slide tests Gulf peg
CBK sets rate at 0.27445 per dollar
DUBAI (RTRS): Kuwait let the dinar make its second-biggest daily gain on Wednesday since it dropped its dollar peg in May, as the US currency’s global slide raised pressure on Gulf neighbours to follow its lead. Kuwait’s Central Bank Wednesday raised the value of the dinar by 0.56 percent against the waning US currency which dropped to a record low against the euro. The dollar, which previously stood at 0.276 dinars, is now worth 0.27445 dinars, the highest value of the Gulf state’s currency against the dollar in more than two decades. On May 20, Kuwait pegged its dinar to a basket of currencies after more than four years of linking it to the dollar, in a bid to reduce inflation.
Since then, the dinar has gained over five percent against the dollar. Central Bank Governor Sheikh Salem Abdulaziz Al-Sabah said last month that de-pegging the dinar from the dollar had helped Kuwait cut inflation which is hovering around five percent. Kuwait had historically pegged the dinar to a basket of currencies before linking it to the dollar on January 5, 2003 in preparation for a single currency in Gulf Cooperation Council states planned for 2010. The dollar-pegged United Arab Emirates dirham hit a new five-year high and forward rates showed investors betting on appreciations of as much as 3.1 percent in the dirham and 2.7 percent in the Saudi riyal in a year. “The fundamental reasons for a revaluation are so strong that some sort of change in currency regimes is inevitable,” Citigroup Global Markets economist Mushtaq Khan said in a note.
“Economic fundamentals and public pressure may be strong enough to trigger a change in policy direction,” he said. Pressure on currency pegs has been building since the United Arab Emirates central bank governor said last week he was considering dropping the dollar peg and tracking the dirham against a currency basket to help contain inflation. On Wednesday the UAE reiterated that it wanted to shift together with other Gulf states preparing for monetary union as early as 2010, including Saudi Arabia, which has ruled out dropping its peg to the dollar.
“It’s not a matter of de-pegging,” UAE Finance Minister Sheikh Hamdan bin Rashid al-Maktoum said. “You need first to have a currency basket at least. And I suggest that this be a basket agreed by Gulf states,” he said in an interview aired by Al-Arabiya television. “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.” Apart from driving up import costs, the dollar pegs force Gulf central banks to track US monetary policy at a time when the Federal Reserve is cutting rates and inflation at home is running at its highest this decade. Rising inflation is undermining the UAE’s efforts to reduce reliance on oil exports, Moody’s Investors Service said on Wednesday. Inflation hit a 19-year high of 9.3 percent last year.
“Inflationary pressures have risen markedly in recent years – stimulated by capacity constraints, strong growth in public expenditure, and the peg to a falling dollar,” the ratings agency said in a report on the second-largest Arab economy. “This threatens to undermine the competitiveness of non-hydrocarbon sectors,” it said. Saudi Arabia, the world’s largest oil exporter, would play a major role in any currency shift, Khan said. Gulf Arab states will probably allow their currencies to appreciate between 4 percent and 5 percent, he said. 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. “If Saudi were to take the initiative on the currency side, other members of the GCC would more likely follow suit,” Khan said. Saudi Arabia fixed its riyal at 3.75 per dollar in June 1986.
CBK sets rate at 0.27445 per dollar
DUBAI (RTRS): Kuwait let the dinar make its second-biggest daily gain on Wednesday since it dropped its dollar peg in May, as the US currency’s global slide raised pressure on Gulf neighbours to follow its lead. Kuwait’s Central Bank Wednesday raised the value of the dinar by 0.56 percent against the waning US currency which dropped to a record low against the euro. The dollar, which previously stood at 0.276 dinars, is now worth 0.27445 dinars, the highest value of the Gulf state’s currency against the dollar in more than two decades. On May 20, Kuwait pegged its dinar to a basket of currencies after more than four years of linking it to the dollar, in a bid to reduce inflation.
Since then, the dinar has gained over five percent against the dollar. Central Bank Governor Sheikh Salem Abdulaziz Al-Sabah said last month that de-pegging the dinar from the dollar had helped Kuwait cut inflation which is hovering around five percent. Kuwait had historically pegged the dinar to a basket of currencies before linking it to the dollar on January 5, 2003 in preparation for a single currency in Gulf Cooperation Council states planned for 2010. The dollar-pegged United Arab Emirates dirham hit a new five-year high and forward rates showed investors betting on appreciations of as much as 3.1 percent in the dirham and 2.7 percent in the Saudi riyal in a year. “The fundamental reasons for a revaluation are so strong that some sort of change in currency regimes is inevitable,” Citigroup Global Markets economist Mushtaq Khan said in a note.
“Economic fundamentals and public pressure may be strong enough to trigger a change in policy direction,” he said. Pressure on currency pegs has been building since the United Arab Emirates central bank governor said last week he was considering dropping the dollar peg and tracking the dirham against a currency basket to help contain inflation. On Wednesday the UAE reiterated that it wanted to shift together with other Gulf states preparing for monetary union as early as 2010, including Saudi Arabia, which has ruled out dropping its peg to the dollar.
“It’s not a matter of de-pegging,” UAE Finance Minister Sheikh Hamdan bin Rashid al-Maktoum said. “You need first to have a currency basket at least. And I suggest that this be a basket agreed by Gulf states,” he said in an interview aired by Al-Arabiya television. “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.” Apart from driving up import costs, the dollar pegs force Gulf central banks to track US monetary policy at a time when the Federal Reserve is cutting rates and inflation at home is running at its highest this decade. Rising inflation is undermining the UAE’s efforts to reduce reliance on oil exports, Moody’s Investors Service said on Wednesday. Inflation hit a 19-year high of 9.3 percent last year.
“Inflationary pressures have risen markedly in recent years – stimulated by capacity constraints, strong growth in public expenditure, and the peg to a falling dollar,” the ratings agency said in a report on the second-largest Arab economy. “This threatens to undermine the competitiveness of non-hydrocarbon sectors,” it said. Saudi Arabia, the world’s largest oil exporter, would play a major role in any currency shift, Khan said. Gulf Arab states will probably allow their currencies to appreciate between 4 percent and 5 percent, he said. 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. “If Saudi were to take the initiative on the currency side, other members of the GCC would more likely follow suit,” Khan said. Saudi Arabia fixed its riyal at 3.75 per dollar in June 1986.