Monday, May 21, 2007

Kuwait abandons dollar peg

Kuwait unshackled its dinar from the tumbling U.S. dollar on Sunday and switched the exchange rate mechanism to a basket of currencies, throwing plans for currency union with other Gulf Arab oil producers into disarray.

Kuwait's central bank, which battled speculators for weeks to defend the peg, said the dollar's slide against other currencies had forced it to break ranks with fellow Gulf states to contain inflation from the rising cost of some imports.

The move stunned Gulf currency markets and volumes dried up. The impact would be clearer on Monday when international markets open, said Steve Brice, chief middle east economist at Standard Chartered Bank in Dubai.
"The massive decline in the dollar's exchange rate against main currencies ... has contributed to the increase in local inflation rates and this step is part of the central bank's efforts to curb inflationary pressure," Sheikh Salem Abdul-Aziz al-Sabah said in a statement carried by state news agency KUNA.

Kuwait was named as the top candidate for a revaluation in a Reuters poll of analysts in March and markets piled pressure on the dinar, betting the central bank would allow an appreciation as the dollar slid to record low against the euro in April.
"The basket would typically mean the euro, sterling, Swiss franc and the dollar," said Mazin al-Nahedh, head of the treasury department at National Bank of Kuwait. In the past the central bank did not disclose the composition of the basket, he said. Kuwait officials talked with nostalgia of the currency basket as the dollar slid on international markets, blaming the U.S. currency for rising inflation, which hit 5.15 percent at the end of the first quarter.
Not sure why "stunned" is an appropriate descriptor given that's the way the betting had been going. Still the the article is worth a "read it all."



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7:50 PM  

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