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Kuwait might set trend by abandoning currency peg

A basket approach to pricing currencies could help curb Gulf inflation.

FX market round up: Kuwait ends dollar peg

Euromoney June 2007

Inflation is rife throughout the Gulf region. Despite agreeing to join a single currency in 2010, and to follow the convergence criteria, Kuwait abandoned its dollar peg, and so the chance to join the currency union, on May 20. This move not only means that there are only four nations left to join a potential currency union – Oman bowed out of the 2010 deadline last year – it has also stirred up uncertainty among the GCC nations as to how they should tackle inflation. Now speculation is rife that other GCC nations might follow Kuwait’s lead and drop the dollar peg in favour of a basket of currencies that could help calm their overheated economies.

It seems, as Sheik Salem Adbelaziz al Sabah, governor of the Central Bank of Kuwait, announced when Kuwait dropped its peg, that the "detrimental effects of the pegging system" are reaching levels where something has to be done. In Kuwait’s opinion a basket, with a 75% to 80% dollar weighting, is the answer to its inflation problems. The weakening dollar has not only limited the dinar’s appreciation rate, but has also raised the cost of non-dollar imports, triggering even greater inflationary pressure.

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