Dubai: Kuwait yesterday allowed its currency to appreciate against the dollar for a second time in two months after the dollar's slide raised pressure on the domestic inflation and its recently adopted peg against a basket of currencies.

The dinar traded at 0.28690 per dollar yesterday, an appreciation of 0.4 per cent, the central bank said, confirming expectations it would respond to the dollar's tumble to record lows against the euro this week.

The dinar has now risen 0.77 per cent since May 20, when the Kuwait central bank dropped its dollar peg and adopted a basket of currencies. "Just as we had predicted a move in second quarter, we also forecast a 0.35 per cent appreciation in third quarter against the backdrop," Steve Brice, an economist with Standard Chartered told Gulf News yesterday.

Despite the second round of revaluation by Kuwait, analysts said yesterday that it is unlikely that other Gulf countries will revalue their pegged currencies. "The rationale of keeping the peg by the Gulf regimes is more political than economic," said a Dubai-based currency trader.

Brice said yesterday that the further revaluation by Kuwait hinted at two possibilities. First, their new basket (against which dinar is pegged) consists only of dollar, and the authorities are calling it a basket to have enough flexibility to move whenever they see fit. Second, there is indeed a basket, but the central bank does not set the rates every day to keep the basket stable but rather makes the adjustments at irregular intervals.

The Kuwaiti central bank yesterday admitted that the dollar has a major share of the basket, although it declined to give its exact composition.

Despite the growing public demand for a revaluation dirham, the UAE central bank and the government have repeatedly affirmed that the country will stick to the peg as part of its commitment to the GCC common currency.

Although any decisive action by other Gulf banks in the near term was ruled out Standard Chartered said in a strategy note yesterday that a further revaluation by Kuwait is likely.

SUBPRIME ISSUE
Dollar hits lifetime low against euro

The dollar dropped to a lifetime low against the euro yesterday as troubles in the US mortgage and credit markets continued to dampen the currency's appeal.

The dollar also hovered around a two-and-a-half-year low against a basket of six major currencies, as investors worried that credit market problems could hurt the economy and lead the Federal Reserve to cut interest rates by year-end.

"There is still some jitters about the subprime issue and that's still weighing on the dollar," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York.

Subprime loans are extended to borrowers with poor credit histories.

Early in New York, the euro was up 0.2 per cent on the day against the dollar at $1.3770, having set a record high of $1.3799. The single currency also hit a lifetime peak at 168.65 yen, according to electronic trading platform EBS, before trading back down to 168.48, up 0.2 per cent on the day.

- Reuters