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Sun 13 May 2007 02:14 AM

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Kuwait to let dinar rise 3%

Central bank will allow currency to appreciate to check inflation.

Kuwait's central bank is expected to allow its dinar currency to appreciate by 3% in the next six months to check inflation and soak up cash pouring into the oil exporter's economy, Deutsche Bank said in a report.

Speculators have been betting Kuwait would allow the dinar to gain to offset the impact of the dollar slide 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 said.

"Although hard to isolate exactly, food price inflation has been the key driver of inflation through 2006 and as this is partly imported there may indeed be an element of tradable inflation in Kuwait," it said.

The cash pouring into the economy from both oil exports and the speculators betting on a dinar revaluation has the potential to stoke inflation further, Deutsche said.

The central bank's reserves jumped 139 % in March from the previous year.

"This surge in liquidity has been brought about by the absence of sterilisation...as foreigners and locals moved funds into the dinar to take advantage of a potential revaluation," the bank said.

Kuwait's central bank governor Sheikh Salem Abdul-Aziz al-Sabah was quoted as saying in December that he could widen the dinar's band to protect the economy against the rising cost of imports from Europe.

As pressure on the exchange rate mounted, the central bank warned markets in March it could move to deter speculation about a revaluation and followed up by cutting key interest rates and the coupon on its benchmark bonds.

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