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Kuwait rethinks dollar peg

Kuwait is considering revaluing its dinar to tackle rising inflation and is weighing the benefits of keeping the currency pegged to the falling dollar, Finance Minister Bader al-Humaidhi said on Saturday.

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.
Asked whether Kuwait could revalue the dinar, which is trading against the dollar at the strong end of its 3.5 % band, Humaidhi said: "We are considering that."

Humaidhi's remarks confirmed that a shift in Kuwait's currency policy was still on the table, even though the central bank and policymakers from other Gulf Arab states have tried to quash market speculation about a dinar appreciation.

"It reaffirms what we have been saying for months," Steve Brice, regional head of research at Standard Chartered in Dubai.

"At the end of the day the central bank would do what's in the best interest of the economy, and if that's a revaluation then that's what they will do," he said.

Speculators have been betting Kuwait would allow the dinar, pegged at $0.28914, to gain to offset the impact of the dollar's decline on the cost of some imports, which is fuelling inflation.

Inflation has been running at 3-4 % in the past nine months compared with a historical average of less than 2 %, Deutsche Bank said in a note last week.

At the end of the first quarter, inflation stood at 5.15 %, the ministry of planning said on Sunday.

Kuwait has blamed rising inflation on the falling dollar, which tumbled to a record low against the euro in April. State news agency KUNA ran a report in March saying the peg to the dollar was viewed as "source of trouble".

BENEFITS OF THE PEG

"Inflation is one of the drivers," Humaidhi said, adding the government expected annualised inflation in 2007 to match the 3.1 % recorded last year.

"Kuwait moved from a basket (of currencies) to the dollar. We are considering whether this is the right idea and what benefits we are from getting this," he said.

Kuwait switched the dinar's peg from a basket of currencies to the dollar in 2003 to prepare for monetary union with Saudi Arabia, the United Arab Emirates and three other Gulf oil producers.

With the monetary union timetable in doubt after Oman, one of the six, opted last year not to meet the 2010 deadline, speculation has grown that some Gulf states would revalue their currencies.

Kuwait was named as the top candidate for a revaluation in a Reuters poll of analysts in March.

Standard Chartered's Brice said he expected Kuwait to revalue the dinar by 1 %. Deutsche Bank expects the currency to appreciate 3 % in six months.

Speculators piled pressure on the dinar in the runup to a Gulf central bankers meeting in April that was expected to hammer out a deal to revive the monetary union plan. The talks ended inconclusively.

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.

Although the pressure has eased, the central bank cut the repurchase rate on May 13 for the second time in six weeks in what analysts said was an attempt to deter any speculation about a dinar appreciation.

Saudi Arabia, largest of the six Gulf economies and a strong proponent of pegs to the dollar, has repeatedly played down the prospect of Kuwaiti revaluation.

Saudi central bank governor Hamad Saud al-Sayyari said last week Kuwait had agreed with the other Gulf states not to change exchange rate policy.

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