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Wed 27 Feb 2008 09:56 AM

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Dinar makes biggest one-day gain this year

Kuwait lets dinar rise against dollar after US currency slid to record low against euro.

Kuwait let the dinar make its biggest one-day gain this year on Wednesday after the dollar slid to a record low above $1.50 to the euro on US data that signalled the world's largest economy is headed for recession.

Kuwait is the only Gulf Arab oil producer whose currency is not pegged to the dollar, which hit $1.5050 against the euro on electronic trading platform EBS early on Wednesday and had hit a record low against a basket of big currencies.

The dinar, currency of the world's seventh-largest oil exporter, has risen 5.95% since Kuwait severed its link to the dollar last May and started tracking a currency basket. It said the weak US currency was fuelling inflation by making some imports more expensive.

Inflation is a growing concern across the world's biggest oil-exporting region, where price rises hit a 27-year peak of 7% in Saudi Arabia and 13.74% in Qatar in the fourth quarter, just off a record.

Dollar pegs in the two states - as well as the UAE, Bahrain and Oman - restrict their ability to fight inflation by forcing them to shadow US monetary policy at a time when the US Federal Reserve is cutting rates to ward off recession.

By contrast, Gulf economies are surging on a near five-fold jump in oil prices since 2002.

Fed Vice Chairman Donald Kohn said on Tuesday that a weak economy was a bigger worry than inflation risks, suggesting a willingness to keep cutting rates from 3% as the central bank tackles "difficult times".

Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs, former Fed chairman Alan Greenspan said on Monday.

Some Gulf policymakers have voiced concerns about the status quo. Qatar is studying revaluing its riyal among options to fight inflation, Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr Al-Thani told newswire Reuters on Saturday.

The exchange rate contributes to about 40% of inflation in Qatar, where the currency is 30% undervalued, Sheikh Hamad said.

Kuwait's central bank has not revealed the composition of its currency basket, saying only that it is weighted largely in dollars. The Kuwaiti currency on Wednesday hit its highest since January 15 - which was a near 20-year peak. (Reuters)

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