Kuwait expected to let dinar rise 3 percent

Kuwait's central bank is expected to allow its dinar currency to appreciate by 3 percent in the next six months to check inflation and soak up cash pouring into the oil exporter's economy, Deutsche Bank said in a report.
The dinar, like the currencies of five other Gulf Arab oil producers, is pegged to the dollar which has tumbled for much of the past 18 months and touched a record low against the euro in April.
Speculation about a revaluation in Kuwait gathered momentum this year as hopes for a deal on regional monetary union faded. The six Gulf Arab states pegged their currencies to the dollar to prepare to create a single currency in 2010.
"We continue to expect the central bank to announce a widening of the current band and expect a 3 percent appreciation of the dinar in 6 months time," Deutsche said in a note, estimating the dinar exchange rate would change to $0.28907 from $0.28914 now.
The dinar, which was allowed to appreciate around 1 percent against the dollar in May last year, is trading at the strong end of the central bank's 3.5 percent band
Speculators have been betting Kuwait would allow the dinar to gain to offset the impact of the dollar slide on the cost of some imports, which is fuelling inflation. Inflation has been running at 3-4 percent in the past nine months compared with a historical average of less than 2 percent, Deutsche said.
"Although hard to isolate exactly, food price inflation has been the key driver of inflation through 2006 and as this is partly imported there may indeed be an element of tradable inflation in Kuwait," it said.
The cash pouring into the economy from both oil exports and the speculators betting on a dinar revaluation has the potential to stoke inflation further, Deutsche said.
The central bank's reserves jumped 139 percent in March from the previous year. "This surge in liquidity has been brought about by the absence of sterilisation...as foreigners and locals moved funds into the dinar to take advantage of a potential revaluation," the bank said. Kuwait's central bank governor Sheikh Salem Abdul-Aziz al-Sabah was quoted as saying in December that he could widen the dinar's band to protect the economy against the rising cost of imports from Europe.
As pressure on the exchange rate mounted, the central bank warned markets in March it could move to deter speculation about a revaluation and followed up by cutting key interest rates and the coupon on its benchmark bonds.