Kuwait in surprise dinar devaluation

Dubai: Kuwait devalued the dinar on Thursday for the first time since at least 2003 as the dollar rebounded against major currencies, signalling the oil producer could start to track global currency markets more closely.

The depreciation of 0.11 per cent could be a prelude to daily adjustments in Kuwait's exchange rate, which until May was pegged to the dollar to prepare for monetary union with five other Gulf Arab oil producers, analysts said.

The dinar will trade around a mid-point of 0.28230 per dollar, compared with 0.28200 set a day earlier, the central bank said.

The dinar has now risen 2.43 per cent from its rate on May 19, the day before Kuwait dropped the peg to the dollar and adopted a basket of currencies, saying the US currency's decline was fuelling inflation by increasing import costs.

Wednesday's appreciation of around 1.7 per cent was the biggest this year and followed the dollar's tumble to a record low against the euro earlier this week. The US currency rebounded on Wednesday, posting its biggest daily gain in a year against a basket of six major currencies.

"The move suggests that Kuwait has activated the currency basket regime it announced in May. The dollar strengthened yesterday so if the basket is now in operation, it was right that the dinar fell," said Simon Williams, economist at HSBC in Dubai.

Kuwait's central bank has never disclosed the composition of the basket, saying only that it consisted of currencies the country uses for imports and investments.

"This suggests that Wednesday's move got the basket to where they wanted it and now they could be adjusting on a daily basis," said Steve Brice, regional economist at Standard Chartered.

The depreciation took analysts by surprise. Brice had expected the Kuwait's central bank to pause to assess the impact of Wednesday's move. Deutsche Bank had a six-month dinar forecast of 0.28073 per dollar with a bias towards appreciation, economist Caroline Grady said in a note on Wednesday.

The magnitude of Kuwait's revaluation on Wednesday also caught markets unawares and triggered speculation that other Gulf countries, especially the United Arab Emirates, would review exchange rate policy.

"That speculation will continue because Kuwait's moves have pushed currency reform up the agenda," said Monica Malik, senior economist at EFG Hermes investment bank in Dubai.

"Any UAE move will be in the medium-term and that even that is unlikely unless it acts with other Gulf states," she said.