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Tue 17 Apr 2007 04:07 PM

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KUNA pegs inflation blame on dollar

Statement by Kuwait's state news agency builds the case for a currency revaluation.

Kuwait's state news agency blamed the dinar's peg to the dollar for rising inflation on Monday, building a case for a currency revaluation after weeks of market pressure on the oil exporter's exchange rate.

"Kuwaiti citizens seem to be extremely worried about inflation, which they view as a source of trouble that has to be resolved," KUNA, which usually reflects the view of the Gulf Arab state's government, said in the report.

"A chief factor that prompted the price hike has been the exchange rate against foreign currencies such as the euro, the pound and the yen, which have risen against the dinar after it was pegged to the U.S. dollar," said the report.

The dollar lost around 10% of its value against the euro last year and touched a two-year low on April 13, fuelling inflation in Kuwait by driving up the cost of some imports.

The central bank has been trying to deter market speculation that it would allow the dinar to appreciate against the dollar to tackle inflation which was running at an annual 3.7% in December.

The bank cut two key interest rates and the coupon rate on benchmark bonds as markets piled pressure on the peg before Gulf Arab central bankers met this month to inject momentum into a flagging monetary union project.

Kuwait, Saudi Arabia and four other Gulf Arab oil producers have pegged their currencies to the dollar to prepare for monetary union in 2010.

With that timetable in doubt after Oman, one of the six states, decided not to meet the deadline, markets are betting that some Gulf states will revalue their currencies. The central bankers meeting in Saudi Arabia produced no breakthrough.

Kuwait was tipped as the prime candidate for a revaluation in a Reuters poll of analysts last month.

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