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Kuwait drops dollar peg... Finally!

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KUWAIT: Kuwait unshackled its dinar from the tumbling US dollar yesterday 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 value of the dinar immediately jumped from 289.14 fils to the dollar to 288.01 fils on the news.

The move stunned Gulf currency markets and volumes dried up. The impact would be clearer today when international markets open, said Steve Brice, chief middle east economist at Standard Chartered Bank in Dubai. Oman and Bahrain, the two smallest Gulf economies, and Saudi Arabia, the largest Arab economy, said they planned to stand by their pegs. There was no comment from the central bank of the United Arab Emirates, whose currency could take centre stage today as prospects for a single currency evaporate.

Kuwait was still committed to monetary union, the central bank governor said in a statement, after changing the dinar's rate to $0.228806, an appreciation of about 0.37 percent. "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.

When Kuwait switched to the dollar peg in 2003 it set the exchange rate at 299.63 fils but allowed it to fluctuate 3.5 percent. The margins were set between a maximum of 310.11 fils and a minimum of 289.14 fils, a level reached last year following the sharp drop of the dollar against major international currencies. Sheikh Salem said the switch will provide more flexibility in setting the exchange rate, thus boosting the ability of the domestic economy to "absorb the impact of sharp fluctuations in the exchange rates of major currencies."

Kuwaiti economist Hajjaj Bukhdour said the decision will help reduce "imported inflation". "The decision will effectively reduce the value Kuwait pays for its imports from countries other than the United States, thus reducing the rate of imported inflation," Bukhdour told AFP. The planning ministry said last week that the inflation rate reached 5.1 percent in the first quarter compared to 3.1 percent last year, but Bukhdour said he believed the actual rate was higher than eight percent. Bukhdour said Kuwait's measure reflected difficulties faced by the alliance to achieve their target by 2010, especially after Oman had announced it will not be able to meet the target date.

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. But the actual decision to abandon a dollar peg adopted in 2003 to prepare for monetary union caught markets and fellow central bankers unawares. "At the Central Bank of Oman we did not know about this," the bank's Executive President Hamood Sangour Al-Zadjali told Reuters by telephone from Muscat. "There was a position by the leaders of all Gulf countries to remain pegged to the dollar and we have abided by that decision," he said.

Oman cast the first doubts on the monetary union project last year when it said it would not meet the 2010 deadline. Kuwait factored that announcement and other delays in finalising the project in its decision to drop the peg, Deputy Prime Minister Faisal Al-Hajji said. The project now appeared to be in even greater jeopardy, said Brice. "One of the criteria of monetary union was a common monetary policy. Now of course we don't have that," he said. "We didn't think the single currency was likely, at least by the 2010 deadline, and we are getting less convinced that it is going to happen at all. This move reduces even further the likelihood."

Kuwait's central bank governor said his country was still committed to monetary union and was only acting in the "national interest" to contain inflation. "Until the completion of all the requirements to achieve the currency union and the launch of the Gulf currency, the Central Bank of Kuwait will continue to adopt the basket system." The statement did not say what currencies were in the basket. "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 US currency for rising inflation, which hit 5.15 percent at the end of the first quarter. "The speed of the switch to the basket has surprised some but the direction of change is in line with expectations, said Simon Williams, economist at HSBC in Dubai. "It's been clear for some time that Kuwait wanted a stronger dinar and a more flexible regime."

The Kuwait's central bank has spent the past six weeks defending the dollar peg as it came under pressure in the run-up to an April central bankers meeting to try to revive the monetary union plan. The talks ended inconclusively. The central bank warned markets against betting on a dinar appreciation and followed up by cutting key interest rates to make dinar-denominated assets less attractive. The last policy move, a 25 basis point reduction in the repurchase rate, was announced on May 13 after market pressure had subsided.

Chairman of Kuwait Real Estate Bank's Board of Directors Abdulwahab Al-Wazzan welcomed the step, saying that it would reflect positively on the dinar and would lead to reducing inflation in the local economy. Chairman of Securities Group Company's (KSCC) Board of Directors Ali Al-Mousa said that the central bank's decision was "right on the money", stating that it would enable the bank to face many negative outcomes. "The decision does not mean that the relations between the dollar and dinar are permanently severed," said Al-Mousa. - Agencies


by that move the unified currency project,, i guess will be onhold!
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by that move, now im beginning to wonder if the unified currency will EVER hpn. and more importantly if it even SHOULD happen?

we wont be able to control our own monetary policies and exchange rate and stuff

Gulf single currency in doubt after Kuwait dumps dollar

KUWAIT CITY (AFP) - Kuwait's decision to stop pegging its dinar to the dollar has only confirmed speculation that oil-rich Gulf states will not be able to meet a 2010 target to launch their single currency, economists said on Monday.

"Certainly, the decision casts a serious doubt over the Gulf states' ability to launch their single currency in 2010... I think such a step is difficult now. It's premature," said Saudi National Commercial Bank chief economist Saeed al-Shaikh.

"It makes it much more difficult to prepare the necessary groundwork for a single currency... It's a step backward," Shaikh told AFP.

The Gulf Cooperation Council, which groups energy-rich Bahrain, Kuwait, Oman, Qatar, United Arab Emirates and Saudi Arabia, has already taken a number of measures in its bid to launch a monetary union and a single currency by 2010.

But last year, Oman said it would not be able to meet the target date while some countries have reportedly expressed reservations on a number of criteria, fuelling speculation that the launch date may not be met.

In a surprising decision on Sunday, Kuwait pegged the dinar to a basket of currencies, more than four years of linking it to the dollar in preparation for the single GCC currency.

"Kuwait's decision clearly confirms that the GCC states will not be able to launch their single currency in 2010... There is not enough time for them to meet the target date," Saudi economist Abdulwahab Abu-Dahesh said.

Kuwaiti officials moved to assure GCC partners that the decision did not mean withdrawing from the single currency, although they stressed the decision was taken due to the slow process and to curb inflation.

"Kuwait will continue to work towards achieving the GCC single currency... We will comply with all the economic and fiscal criteria necessary for the single currency," Finance Minister Bader al-Humaidhi said in a statement.

He said the decision was taken to curb rising inflation that reached four percent due to the weak dollar, and to cut the cost of Kuwaiti imports from countries other than the United States.

State Minister for Cabinet Affairs Faisal al-Hajji said the move was taken because the process for a GCC single currency "was moving slowly."

Shaikh said Qatar and the UAE "could resort to similar decisions in a bid to offset soaring inflation rates," resulting from the weak dollar.

GCC states have agreed to a number of monetary union criteria but failed to reach a consensus on several key issues.

The main stumbling blocks include agreement on an inflation rate, which has soared in Qatar and UAE and the lack of political willingness by member states to relinquish part of their independence in favour of a single currency.

"I think the main problems for the single currency right now are the high inflation rates, most of it imported, and the weak dollar. GCC states can't determine if the dollar weakness is chronic or temporary," Abu-Dahesh said.

Kuwaiti economist Hajjaj Bukhdour said the emirate's decision has "dealt a heavy blow to the GCC monetary union and single currency and the 2010 target year is now impossible to meet."

"For now, we have to say goodbye to the GCC single currency. I think they need several more years to launch it and that would require Kuwait reverting to the dollar peg which requires time," Bukhdour said.

Yahoo! News
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^^ keep our dinar
trouble is, the US dollar is bound to fight back again... yes its tumbling, but only for the time-being. fluctuations occur everywhere around the world, not only in the US. dropping the dollar peg with such an economic power is alright for the short period. we must now find another group of currencies to work with. a unified gcc currency would help us alot, considering the size of kuwaits economy isnt big enough to allow us survive on our own...
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