VARIOUS: Kuwait drops dollar peg casting the spotlight onto the United Arab Emirates

Record ID: 350815

  • Title: VARIOUS: Kuwait drops dollar peg casting the spotlight onto the United Arab Emirates
  • Date: 22nd May 2007
  • Summary: COMPUTER SCREEN
  • Embargoed: 6th June 2007 13:00
  • Keywords:
  • Topics: International Relations
  • Reuters ID: LVAEVBAMBUA40YBZRXA80ZF6ZDO3
  • Story Text: Kuwait unshackled its dinar from the tumbling U.S. dollar on Sunday (May 20) and switched the exchange rate mechanism to a basket of currencies, throwing plans for currency union with other Gulf Arab oil producers into disarray. Kuwaiti nationals rejoiced at the news of their currency's new-found 'independence', claiming that the dinar will now have the opportunity to show its real power and value.
    ''This is great because the dinar is very strong, and God-Willing, in the summer after these decisions (to unpeg the dinar from the dollar, and peg it to a basket of currencies) have been implemented, you will see how the dinar measures up to the dollar. I expect ... I've heard that the dollar will reach 280 fils, like it was in the past. The dinar isn't just tied to the economy, but to oil as well. It is known how strong and how supported the dinar is in the region'', said Kuwaiti national, Yousef Hussain.
    Kuwait justified the move on the necessity to control rising inflation. The dinar's release from the dollar gives the Kuwaiti central bank more flexibility with regards to interest rates and exchange policies.
    ''It's a lot better because it contains inflation. It's a good decision, it catalyses the economy'', said Kuwaiti national, Abdel-Karim Ahmed.
    Kuwait has, allowed the dinar to appreciate against the dollar by
    37%
    ''Now, the Kuwaiti dinar has gone up in value, and the dollar has fallen. When the dollar falls, all the currencies will devalue, I mean all the Gulf currencies and Asian currencies (pegged to the dollar) will fall relative to the Kuwaiti dinar," said Kuwaiti national, Nazir Ahmed.
    The United Arab Emirates central bank kept markets guessing on whether it might change foreign exchange policy on Monday (May 21) , after Kuwait dropped its dollar peg and adopted an exchange rate based on a basket of currencies, the latter citing that its move was made to contain rising inflation in the country.
    ''Kuwait are quite worried about inflationary pressures so they wanted to do something about that. Obviously the peg precludes them from doing anything in terms of interest rates or in terms of the currency. They've moved to now a peg against a basket of currencies, and not just the dollar. They've also allowed the currency to appreciate against the dollar by 0.37% so, this gives them more flexibility to deal with inflationary pressures'', said Steve Brice, regional head of research at Standard Chartered.
    A UAE revaluation, seen as more likely after Kuwait's switch on Sunday, would make regional monetary union even more difficult by a 2010 deadline and send another bearish signal from Gulf oil exporters about outlook for the tumbling dollar. Despite UAE inaction as of yet, other GCC members have expressed their commitment to the dollar peg, smiting any speculation.
    ''Four countries have made it very clear both before Kuwait's announcement and after that they're not going to revalue their currency or move to a basket of currencies for the foreseeable future. That's Saudi, Oman. Bahrain and Qatar. The key uncertainty is surrounding the UAE. The UAE central bank governor al-Suweidi has been indicating, or has been a leading proponent of currency flexibility at some point in the future. The UAE central bank hasn't responded yet to Kuwait's move yesterday, and the longer that they don't, obviously the more likely it is people will perceive that there is going to be some sort of move from the UAE'', said Brice.
    Kuwait will now need to buy fewer U.S. assets when it accumulates reserves to defend the exchange rate, although the impact on dollar would be negligible, Scandinavian bank Nordea said in a research note.
    "If other countries in the region will follow, however, we see a risk of a modest dollar weakening," it said.
    After Kuwait, the UAE was the most likely candidate to loosen a dollar peg the six oil producers agreed would stay in place until monetary union, according to analysts polled by Reuters in March.
    Kuwait cited the inflation, which touched 3.7 percent in December and
    5 percent at the end of March, as main reason for abandoning the dollar peg.
    With the dollar hitting a record low against the euro in April, Kuwait's central bank was forced to act in the "national interest" and break ranks with fellow Gulf Arabs states over the currency pegs, the central bank said on Sunday.
    The UAE, where inflation hit 10 percent at the end of last year, and Qatar, with record inflation of 11.83 percent in 2006, had more reason to cushion their economies from the rising cost of imports, Citigroup analyst David Lubin said in a note.
    The office of UAE central bank governor Sultan Nasser al-Suweidi said he would not comment.
    "A build up of speculative positions betting on further revaluations in the region seems very likely now," Lubin said in the note.
    The UAE dirham hit a one-week high of 3.6710 per dollar compared with its official peg of 3.67275. The Saudi riyal touched a six-week high at 3.7498 per dollar, just off its official
    75 per dollar peg.
    Like Kuwait, the UAE cut interest rates in April to deter speculators betting the central bank would allow the currency to appreciate as the dollar slid.
    Suweidi first raised the prospect of a currency revaluation in an interview with Reuters in January, although he has repeatedly said he would not act alone.
    Kuwait also cited the diminishing prospect of meeting the 2010 deadline for a single currency as one factor behind its decision to drop the dollar peg, adopted in 2003 to create a platform regional economic integration.
    Qatar central bank governor Sheikh Abdullah bin Saud al-Thani said monetary union was still on the table, although the timetable was not crucial.
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