Kuwait halts dollar flows used for forex bets

CURRENCY BETS: The Kuwaiti dinar depegged from the dollar in May 2007. (Getty Images)

The Kuwait central bank is no longer allowing local banks to buy US dollars from it and sell them to it for currency trades, bankers said on Monday, a move that has blocked offshore banks from betting on the dinar.

The central bank has notified lenders in the Gulf state that it is reverting back to a previous system whereby it will only buy or sell dollars to them for commercial purposes, not to cover interbank transactions, bankers in Kuwait and Dubai said.

The move could be designed to clamp down on speculators by stopping local banks from using cheap central bank liquidity to enable offshore banks to take positions, a common practice, some bankers said.

"The central bank has informed banks in Kuwait of the change through its channels," said Shahid Mohammad, treasurer at Kuwait's Gulf Bank.

"I can see some illiquidity in the offshore market, but I think the market will pick up again in a couple of days because the central bank has not put any restrictions on interbank trading," he said.

Kuwait central bank officials were not available to comment on the move. Kuwait dropped the dinar's peg to the US dollar in May 2007 in favour of a basket of currencies, and the central bank now adjusts the currency's reference rate versus the dollar every morning at 0800 local time.

The central bank has not disclosed the composition of its basket, saying only it is comprised mainly of dollars. This has allowed currency traders to take positions on the dinar based on how the dollar performed against global currencies a day earlier, traders said.

"I'm presuming they want to stop speculation on the dollar-dinar daily fix," said Jason Goff, head of group treasury and market sales at Emirates NBD, the largest Gulf Arab bank by assets.

"Banks have been speculating in that market and the central bank wants to control foreign exchange flows," he said.

But bankers in Kuwait said the central bank's policy of backing interbank trades had only ever been designed as a temporary measure. It was implemented about a year ago at the height of Gulf currency speculation to ensure there were adequate dinars in the banking system.

Investors piled into Gulf currencies last year betting the oil producers would follow Kuwait's lead and sever their dollar pegs to fight inflation.

"We used to hear about huge speculative positions selling dollars and the central bank was injecting dinars into the system to provide liquidity for local bank customers," said acting treasurer at National Bank of Kuwait, Sulaiman Al-Marzouk.

"Now the central bank believes that speculation has faded away and there is genuine business. It is saying to local banks, it is your job to quote the bid and offer," he said.

Trading in the Kuwait dinar spot dried up on Monday after the move, which has created an illiquid offshore market for trading in dinars, traders said.

One Dubai currency trader said the Kuwait dinar market was now "dead", saying the spread on the dollar-dinar would widen as a result and liquidity would only dry up further.

The Kuwait central bank has been trying to control liquidity among measures to battle inflation that hit 11.1 percent in May, just off a record. It tightened bank curbs on consumer lending in March to control credit growth. (Reuters)

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