Kuwait may switch from dollar peg to currency basket

By John Fraher and Will McSheehy
Bloomberg News Service
Wednesday, January 24, 2007

http://quote.bloomberg.com/apps/news?pid=20601170&sid=ajeGEZzXBwfY

DAVOS, Switzerland -- 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 losses from a weakening U.S. currency.

"We might go to a basket for an interim period," Bader al-Humaidhi, Kuwait's finance minister, told reporters at the World Economic Forum in Davos, Switzerland, today. "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.

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

A study of the Gulf Cooperation Council states' current account balances, inflation, and costs of goods and services shows most of their currencies are undervalued against the dollar, Deutsche Bank AG said in a Jan. 11 report.

The Kuwaiti dinar is trading at the top of a 3.5 percent range around a reference rate set when the dollar peg was established in January 2003. Sheikh Salem Abdul Aziz al-Sabah, Kuwait's central bank governor, last month said he may decide to widen the band or change the peg if the U.S. currency continues to weaken and threatens domestic growth.

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