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Kuwait curbs demand for dinars

Kuwait has moved to deter investors betting it would allow its dinar to appreciate after a currency policy shift last week by closing a window banks used to lend short-term funds to the central bank.

A week after the oil exporter allowed its currency to rise against the U.S. dollar, the central bank suspended the use of its one-month intervention rate, pushing more dinars on to the interbank market.
The intervention rate will not be used "until further notice," a central bank official, who declined to be identified, said.

The central bank gave no reason for the move.

The intervention rate was the main instrument through which the central bank took in short-term dinar deposits from banks in Kuwait.

By taking itself out of the market, the central bank forced banks to trade among themselves to place short-term funds, dampening demand for dinars.

The one-month Kuwait inter-bank offered rate fell to 5.1875% on Sunday from 5.2500 the previous day, central bank data showed.

"The central bank has indicated that it would take necessary measures to make sure speculators don't benefit and this may stop any new inflows," said Randa Azar-Khoury, chief economist at National Bank of Kuwait.

"But this will hurt banks which need to invest excess liquidity."

Kuwait dropped the dinar's peg to the dollar last week and adopted a basket of currencies, allowing the dinar to appreciate 0.37% against the dollar.

The central bank has held the dinar at $0.28806 since the May 20 policy shift despite speculation the appreciation was the first of many moves.

Kuwait broke ranks with Saudi Arabia and four other Gulf oil producers, which had pegged their currencies to the dollar to prepare for monetary union in 2010.

Kuwait's central bank said the dollar's slide over the past year, including to a record low against the euro in April, was driving up inflation by making some imports more expensive.

The central bank has not disclosed the composition of the basket, saying only it consisted of the currencies Kuwait uses for imports and investments. The dollar still held a major share, the central bank said last week.

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