U.S. Dollar continues to loose support worldwide

January 24, 2007
Kuwait May Abandon Dollar Peg to Protect its Economy
By Will McSheehy

Jan. 24 (Bloomberg) -- Kuwait, the third-largest Arab oil producer, may abandon the dinar's peg against the dollar in favor of a basket of currencies to help minimize economic harm after the dollar declined.

``We might go to a basket for an interim period,'' Bader al- Humaidhi, Kuwait's finance minister, told reporters today at the World Economic Forum in Davos, Switzerland. ``The dollar fell a lot against the euro last year, but if we'd been linked to a basket we wouldn't have suffered'' as much.

Al-Humaidhi declined to comment on which currencies might be in the basket. A switch from the dollar is being studied by Kuwait's central bank, he said. The Kuwaiti dinar rose to 0.28915 against the dollar as of 4 p.m. in London, from 0.28920 yesterday, according to Bloomberg data.

Dollar reserves are being replaced with euros by oil producers including the United Arab Emirates and Venezuela. China, which has the world's largest foreign-exchange reserves, and Indonesia say they plan to increase euro reserves and Iran says it's boosting oil sales priced in euros.

The dollar has declined 5.2 percent against the euro in the past 12 months. The currency traded at $1.2955 against the euro at 12:47 p.m. in New York from $1.3026 yesterday, when it reached a two-week high of $1.3044.

Currencies Undervalued

Most of the currencies of the six Gulf Arab states, including Saudi Arabia and Kuwait, are undervalued against the dollar, based on their current-account balances, inflation and costs of goods and services, Deutsche Bank
AG said in a report this month.

``Without the peg, Gulf currencies would have appreciated in the past couple of years because of the increase in oil prices,'' thus boosting the cost of imports, Standard Chartered Plc economist Monica Malik said in a telephone interview today from Dubai. ``Instead they weakened against other major currencies owing to the dollar.''

The six Gulf Arab states earned as much as $500 billion from oil sales last year, according to the International Monetary Fund. About two thirds of that amount is likely to be invested in overseas savings and investments in countries including the U.S.

The U.S. needs to attract about $2.5 billion a day from foreign investors to keep the dollar steady and fund a current- account deficit that widened to a record $225.6 billion in the third quarter of last year.

G-7 Urge Float

Kuwait in 2003 became the last of six Gulf Arab monarchies including Saudi Arabia to peg its currency to the dollar in readiness for a single currency planned for 2010.

The Kuwaiti dinar is trading at the top of a 3.5 percent permitted band set when the dollar peg was established in January 2003.

Kuwait central bank governor Sheikh Salem Abdul Aziz al- Sabah last month said he may decide to widen the range or change the peg if the U.S. currency continues to weaken and threatens domestic growth.

The Group of Seven industrial nations, including the U.S., Japan, Germany and the U.K., in April urged countries with current-account surpluses to allow their currencies to appreciate to help adjust global imbalances.

``I don't think other Gulf countries are going to adjust their pegs,'' Dorothee Gasser, a Middle East and Africa economist at ING Bank NV in London, said in a phone interview today. ``What we are likely to see is that they are going to convert some of their reserves into gold. It's bearish for the dollar.''

Single Currency

Crude oil futures in New York reached a record on July 14. They have since fallen because of rising stock piles in the U.S. and receding security concerns in oil producing nations. Oil at around $55 a barrel is still almost three times higher than five years ago.

Kuwait remains committed to a single currency for the Gulf states, al-Humaidhi said today. ``The 2010 target is still the same. I hope we can meet it,'' he said.