Oman has ruled out revaluing its rial against the dollar following Kuwait’s decision to revalue the dinar against the US curency for the third time in two months.
The country’s acting central bank governor said today the decline of the dollar is “a passing phase”.
“We do not intend to do anything,” Mohammed Nasser al-Jahadhmy, executive vice president at the Central Bank of Oman, told Reuters.
“We are comfortable with out exchange rate,” Jahadhmy said. “It’s a passing phase,” he said of the dollar’s slide. “It will come back.”
Kuwait allowed the dinar to appreciate around 1.7% against the dollar earlier today, renewing market speculation that the US currency’s slide could force other Gulf oil producers to review their pegged exchange rates.
The dinar will trade at 0.28200 per dollar with the central bank buying dollars at 0.28195 and selling them at 0.28205, the central bank said. The previous rate was 0.28690 per dollar.
The move, larger than the market was expecting, revived speculation that other central banks in the world’s biggest oil-exporting region would follow Kuwait, said Rohit Kedia, a treasury manager at Emirates Bank International in Dubai.
The UAE dirham strengthened to 3.67219/22 from 3.67229/31 to the dollar in early trading and the Saudi Arabian riyal ticked up to 3.7495/97 from 3.7505/6. “The Kuwait dinar is no longer a discount currency. Kuwait is dead now, the focus is shifting to the dirham,” Kedia said.
The central banks of the UAE and Saudi Arabia, and their neighbours, Bahrain, Qatar, and Oman, have repeatedly ruled out changing exchange rate policy. The five states and Kuwait agreed in 2003 to keep currencies pegged to the dollar to prepare for monetary union in 2010.
Kuwait dropped the dollar peg on May 20 and adopted a basket of currencies, saying a weaker dollar was driving up inflation by making imports more expensive. The currency of the Middle East’s fourth-largest oil exporter has now appreciated around 2.5% since May 19.
“The increase was larger than the market expected, but if you look at the scale of the dollar decline over the last year or so, the previous adjustments only got Kuwait back a small part of that ground that it had lost,” said Simon Williams, economist at HSBC in Dubai.
The dollar fell to a 2-1/2-month low against the yen on Wednesday on fears about U.S. credit market turmoil and housing sector weakness.
Earlier this week, the dollar hit an all-time low against the euro and tumbled to a 15-year low against a basket of six major currencies. Kuwait’s central bank has refused to give the exact composition of its currency basket, only saying it consisted of currencies the country uses for imports and investment, and that the dollar was a major component.
Before Wednesday’s move Standard Chartered had estimated the US currency accounted for around 70% of the basket.
“It means either that a dollar weight in the basket of 70% is too large, or they actually want the dinar to appreciate against major currencies because they are worried about inflationary pressures,” said Steve Brice, regional economist at Standard Chartered.
Inflation in Kuwait was 5.15% at the end of March, according to the latest available official data. Kuwait newspapers carried a series of reports on Wednesday about the impact of the dollar’s decline on imported inflation.
“Citizens of Gulf and OPEC countries suffer a loss of purchasing power,” read the headline of Al-Qabas newspaper’s main economic story, which focused on dollar weakness. Muhammad al-Mutairi, chairman of the Union of Cooperative Societies, told the Arab Times he expected steep increases in some commodity prices and urged the government to intervene.
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