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Kuwait again lets dinar rise to reflect dollar's decline

Section: Daily Dispatches

From Reuters
via Daily Times, Lahore, Pakistan
Friday, July 13, 2007

DUBAI -- Kuwait allowed its dinar to appreciate against the dollar for a second time this year after the US currency's slide raised pressure on pegged exchange rates throughout the world's biggest oil-exporting region.

The dinar would trade at 0.28690 per dollar from Thursday, an appreciation of 0.4 percent, the central bank said, confirming expectations that it would respond to the dollar's tumble to record lows against the euro this week.

The currency of the world's seventh-largest oil exporter has now risen 0.77 percent since May 20, when the central bank dropped its dollar peg and adopted a basket of currencies.

The central bank has said the dollar has a major share of the basket, although it declined to give its exact composition.

"It was anticipated because it is the most flexible exchange rate and they have already moved," said Claire Dissaux, emerging markets strategist at Calyon in Paris.

"The question is which countries will be next," she said, citing the United Arab Emirates and Qatar as the most likely candidates for a revaluation.

The central banks of both Gulf Arab states, which have the region's highest inflation rates, ruled out any change to their exchange rate regime after Kuwait's last revaluation. Neither returned calls for comment on Thursday. Kuwait's central bank said on May 20 it wanted to contain the impact of the dollar’s slide on imports, which was driving up inflation.

"I think it's likely there will be further small-scale adjustments during the course of this year," Simon Williams, economist at HSBC in Dubai said after the latest move.

On Wednesday a Kuwait parliament committee urged the government to allow the dinar to reflect the real value of the US dollar. The dollar hit a fresh low against the euro on Wednesday and a 26-year trough against sterling.

"Until we broke through new levels in the euro and sterling there was a feeling that dollar weakness would be temporary but now ... they feel the need to act," said Steve Brice, regional head of research at Standard Chartered.

Other Gulf Arab central banks could not immediately be reached for comment on Thursday, the first day of the weekend in Saudi Arabia and Kuwait.

Those two countries, along with Qatar, the UAE, Bahrain, and Oman, had pegged their currencies to the dollar to prepare for monetary union in 2010. That timetable has been in doubt since Oman said last year it would not meet the deadline. Kuwait's May revaluation plunged the project into crisis.

Kuwait had tracked its dinar against a currency basket until it adopted a dollar peg in 2003. That basket was 85 percent in dollars, 10 percent in euros and 5 percent in sterling, Brice said.

The central bank has said only that the new basket consisted of the currencies Kuwait uses for imports and investment.

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