DUBAI, Feb 15 (Reuters) - The Kuwaiti central bank has succeeded in reducing downward pressure on the dinar by using its daily fixings of the currency’s spot rate to deter traders from speculating against it, commercial bankers say.
All of the currencies of the Gulf’s six wealthy oil exporting states have come under pressure in recent several months as low oil prices have slashed governments’ revenues and forced them to draw down overseas assets.
While five of the currencies are pegged to the U.S. dollar, the Kuwaiti dinar is pegged to a weighted basket of the currencies of Kuwait’s big trading partners. The basket’s composition is not disclosed but it is believed to be dominated by the dollar, with the euro playing a significant role.
Reflecting jitters about the long-term impact of cheap oil on Kuwait’s finances, the dinar fell sharply against the dollar in the forwards market last month. One-year dollar/dinar forwards jumped as high as 780 points in the last few days of January, their highest level since February 2009.
Since then, however, one-year forwards have fallen back, to around 700 points, and the dinar has strengthened sharply in the spot market, to 0.29849 against the dollar from around 0.3035 - its fastest appreciation since 2010.
“The central bank has stemmed further downward pressure on the dinar with its strategy, and has given a clear signal to the market that it will step in to defend the currency when needed,” one banker said.
The bankers declined to be named because of commercial sensitivities. An official at the Kuwaiti central bank could not be contacted to comment.
One reason for the dinar’s rebound has been a recovery of the euro against the dollar, traders say. The euro has surged about 2.9 percent against the dollar since late January to around 1.1200.
Another reason is the Kuwaiti central bank’s management of the dinar’s daily fixing against the dollar, which serves as a reference point for the day’s trade in the spot market, traders said.
The central bank has some leeway in setting the fixing in relation to the currency basket, and since late January it has raised its fixings by 1.5 percent — capturing an unusually large fraction of the euro’s rebound.
In contrast, when the euro depreciated 7 percent against the dollar in the three months to early December, the dinar fixing weakened only about 1 percent.
Some traders believe the Kuwaiti central bank has imitated the Saudi central bank, the Saudi Arabian Monetary Agency (SAMA), in deterring oil price-related speculation against its currency.
In January, the dollar rose to a record high against the Saudi riyal in the forwards market because of speculation that the riyal’s peg might eventually be scrapped.
But SAMA privately warned banks against speculation in the riyal, telling them to stop offering options contracts on riyal forwards. Since then, dollar/riyal forwards have dropped back sharply.
“Fear of a SAMA-style intervention in the dinar forwards market has caused the onshore banks to reduce their positions,” a second banker said. (Editing by Andrew Torchia and Katharine Houreld)