Kuwait Ends Dollar Peg, Pressuring Region to Follow


By Arif Sharif and Matthew Brown

May 21 (Bloomberg) -- Kuwait's decision to abandon a peg to the dollar, the first such move by a Middle Eastern country, may put pressure on the United Arab Emirates and Qatar to do the same as inflation accelerates.

The dinar rose 0.4 percent against the dollar after Kuwait ended the peg and switched to a basket of currencies. A slump in the dollar has pushed up the cost of imports from Europe and Asia for Middle Eastern consumers. Yesterday's decision may make it more difficult for Kuwait to meet a timetable to join five other Gulf Arab monarchies in forming a single currency by 2010.

"The perception in the market is that Kuwait will be a leader,'' said Monica Fan, global head of foreign-exchange strategy at RBC Capital Markets Ltd. in London. The central bank's decision will probably "increase speculation in the market that the other central banks will make similar moves.''

The Qatar riyal strengthened 0.01 percent today, the most since Feb 9. The U.A.E. dirham gained the same percentage, its biggest advance in a week. The Saudi riyal was unchanged.

Kuwait's central bank held the dinar steady today after the currency strengthened yesterday. It bought the dinar at 0.28811 to the dollar and sold at 0.28801, the same rates as yesterday.

Governor Sheikh Salem Abdul Aziz al-Sabah first suggested a shift in policy in December, saying he would consider revaluing the dinar should inflation remain higher than its 2 percent target. Inflation in Kuwait averaged 3 percent last year, central bank figures show.

Inflation Risk
Inflation in the U.A.E. and Qatar are even higher. Price gains in Qatar accelerated to a record 11.83 percent in 2006, according to the country's Planning Council. In the U.A.E. they reached 10.1 percent, from 7.8 percent in 2005, according to the International Monetary Fund.

"The U.A.E. remains the most at risk of abandoning its peg,'' said Dorothee Gasser, a Middle East and Africa economist at ING Bank NV in London. "The dollar is still important with regards to trade flows in the region. It's unlikely to happen in the short term.''

Qatar will keep the riyal's peg to the dollar, the Al-Sharq newspaper reported today, citing Central Bank Governor Abdullah Bin Saud Al-Thani. The central bank of the U.A.E. wasn't immediately available for comment.

The Kuwaiti dinar, which had been pegged to the dollar since the beginning of 2003, was little changed today. The currency strengthened about 6 percent against the dollar when it was linked to a basket of currencies between 1975 and the end of 2002, according to data compiled by Bloomberg.

Single Currency
"We may see greater volatility coming through in coming days,'' said Steve Brice, an economist at Standard Chartered Bank Plc in Dubai.

Options traders increased bets today on fluctuations in regional currencies. So-called implied volatility on the one- year Kuwaiti dinar options gained about 1 percentage point, according to data from Standard Chartered in New York.

Volatility on U.A.E. one-year dirham options edged up about a quarter of a percentage point to 1.75 percent.

The dinar was previously allowed to trade 3.5 percent either side of a central rate of 0.29963 to the dollar.

The six Gulf Arab monarchies of Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain plan to form a single currency by 2010. Kuwait remains committed to the plan and will support all efforts to achieve it, al-Sabah said yesterday.

"I don't think they are going to reach the target by then,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. "I think they have the inflation problem to begin with. The date looks overly ambitious.''

The dinar was first introduced in 1960 a year before Kuwait gained independence from the U.K. Previously the country used the Persian Gulf rupee, linked to the Indian currency.

Syria to End Dollar Peg, 2nd Arab Country in 2 Weeks


By Zainab Fattah and Matthew Brown

June 4 (Bloomberg) -- Syria became the second Middle Eastern nation in two weeks to say it will dump its currency's peg to the dollar to curb rising import costs and inflation.

The country will link the Syrian pound to a broader range of currencies starting in the middle of July, central bank Governor Adib Mayaleh said.

"The decision is final,'' he said in a phone interview from Abu Dhabi. "This will help stabilize the Syrian pound and bring down inflation.''

The shift away from the dollar among Middle East countries is a sign of the waning attraction of the currency for central banks around the world. The dollar made up 64.7 percent of global foreign-exchange reserves in the fourth quarter, down from 65.8 percent in the prior three months, International Monetary Fund data show. The euro's share was 25.8 percent, the highest since its 1999 debut.

Syria is broadening its peg after the country's currency was dragged lower against the euro by a 10 percent slide in the dollar last year, pushing up the cost of imports from Europe. Kuwait switched to a basket of currencies on May 20 because of gains in consumer prices, which are also accelerating in the United Arab Emirates and Qatar.

"The weaker dollar is fueling inflation,'' said Dorothee Gasser, an analyst at ING Bank in London. "We see the U.A.E. as the next possible shifter.''

Who's Next?
The U.A.E. dirham slid 0.01 percent to 3.6727 against the dollar today, the Qatari riyal gained 0.01 percent to 3.6392, and the Saudi riyal was little changed at 3.7504. The Syrian pound was unchanged, according to data compiled by Bloomberg.

Syria will tie its currency to so-called special drawing rights, certificates issued by the IMF that represent a basket of currencies including the dollar, euro, yen and U.K. pound.

Mayaleh said today that the pace of price gains in Syria may slow to 8 percent this year, from 10 percent in 2006, because of the decision.

U.A.E. Prime Minister Sheikh Mohammed bin Rashid al-Maktoum said on May 22 that the country would keep its link to the dollar, even after inflation quickened to 10.1 percent in 2006, from 7.8 percent the year before.

"Inflation is a risk for all these countries and allowing their currencies to appreciate versus the dollar is one way to address that,'' Jon Harrison, an analyst at Dresdner Kleinwort Group Ltd., said in London.

'We're Technocrats'
Qatar's consumer price index leapt 14.8 percent from a year earlier in the first quarter of this year, from 12.8 percent in the prior three months.

Rising costs in the U.A.E. and Qatar are "a clear call for currency revaluation,'' Serhan Cevik, a London-based economist at Morgan Stanley, said in an e-mailed research note last week.

Syria, under fire from the U.S. for alleged support for terrorism, said in July last year it planned to dump the dollar peg by the end of 2006 to reflect closer trade ties with Europe.

The Central Bank of Syria had converted half its currency reserves to euros, Mayaleh said last July. The reserves, including gold, totaled $4.1 billion at the end of 2005, according to the U.S. Central Intelligence Agency.

Mayaleh said today the switch in the peg would contribute to investment growth and "there's no political reason'' for ending the dollar link. "We're technocrats,'' he said. Reuters earlier today cited Mayaleh as saying that previous plans to end the dollar peg had been held up.

The IMF based the valuation of SDRs as of Jan. 1, 2006, on a weighting of 44 percent for U.S. dollars, 34 percent for euros and 11 percent each for the yen and U.K. pound.