Kuwait abandons US dollar currency peg
By Simeon Kerr in Dubai
Kuwait on Sunday removed its currency peg to the US dollar, throwing plans for a Gulf currency union by 2010 into doubt and raising the prospect that other oil-producing states might abandon long-held dollar pegs.
Sheikh Salem Abdelaziz Al Sabah, governor of the Central Bank of Kuwait, told the official Kuwait news agency that the decision had been made owing to the "detrimental effects of the pegging system to the national economy".
Since late last year, Kuwaiti officials have hinted that the country would revert to a basket of currencies to prevent the sliding dollar increasing the cost of imports, which has stoked inflation to more than 4 per cent, double the historic average. This has encouraged speculators to plough billions of dollars into the dinar over the past few months, betting that the central bank would allow the dinar to appreciate.
On Sunday, the dinar traded up 0.4 per cent as the central bank replaced the peg with a basket of undisclosed currencies. The central bank had allowed the currency to vary up to 3.5 per cent from the peg, but the dinar had been at the top end of the approved trading band for a year owing to the continuing weakness of the dollar and the strength of Kuwait's oil-driven economy.
The dollar is expected to make up about 75-80 per cent of the new basket, reducing the third largest Arab oil exporter's exposure to the weakening dollar.
Kuwait dropped its currency basket in 2003, adopting a dollar peg as part of the Gulf Co-operation Council countries' drive to create a unified economic block with a single currency by 2010. But doubts over the ability of the GCC economies to harmonise have arisen, with one member of the six-nation council, Oman, saying it would not meet the convergence criteria.
"There have already been a lot of question marks over currency union taking place; this raises an additional one," said Simon Williams, an economist with HSBC in Dubai.
Kuwait's move may come as a surprise to other GCC states, such as Saudi Arabia and Bahrain, which have been repeating their commitment to the peg in recent weeks, saying that any revaluation should be agreed collectively by the GCC.
Mr Williams did not believe other GCC states would follow suit on revaluation quickly, as these countries have clung to dollar pegs since the early 1980s.
But other GCC states – Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Oman – are studying the move as an option to mitigate dollar weakness.