Kuwaiti banks have made it more expensive for speculators to bet on the dinar-dollar exchange rate after the central bank withdrew an interbank guarantee this month, drying up liquidity, bankers and traders said.
As the dollar strengthens on global markets, investors expect Kuwait's Central Bank – which tracks the dinar against a basket of currencies comprised mainly of dollars – to allow the currency to fall. Selling dinars on the interbank market has become more expensive since the central bank this month withdrew a temporary facility to guarantee the availability of dinars at a fixed rate in the interbank lending market, bankers said.
"Clearly there is interest to sell the Kuwaiti dinar because with the dollar strengthening, the dinar now starts to depreciate," according to a banker in Kuwait, who declined to be identified.
Banks are now responsible for quoting the bid and offer for non-commercial transactions because the central bank will only guarantee its rate for banks' corporate customers. One dinar costs $3.7425, according to the central bank's reference rate yesterday, and $3.7313 on the interbank market – so investors get fewer dollars for each dinar on the interbank market. "If anybody is looking to buy dollars, it is more expensive on the interbank market than from the central bank," the banker said.
Under the new rules, local banks facing high demand for dinars from foreign speculators no longer have unlimited access to dinar funding from the central bank unless it is for a genuine corporate business.
The spreads on dollar and dinar trades on the interbank market have thus widened – indicating a lack of liquidity, another deterrent to currency bets, said Kamal Jagtiani, a broker at Pan Arab Management in Kuwait.
The spread between the bid and the offer is now about 45 points compared with a spread of 10 points for the official Kuwait central bank rate. The central bank generally adjusts the dinar's rate at 8am local time.
"This has quietened the market a lot," Jagtiani said. "If you need to speculate on a currency you need market players. The liquidity has dried up because before you had a spread of eight, nine or 10 points, whereas now it is closer to 50."
Yesterday, interbank bids for dollars were 0.26775 and offers were 0.26820, for a mid point of 0.26800. The central bank's reference rate is 0.26720, the mid point between a bid and offer that are 10 points apart.
After severing its peg to the dollar in May 2007, the central bank temporarily broadened a facility designed to cover banks' dinar positions to include interbank market transactions to facilitate dinar exchange flows, it said this month.
By boosting competition on the interbank market, meanwhile, market interest rates have jumped since the move – helping boost corporate borrowing costs as the central bank tackles inflation at a near-record 11.1 per cent in May.
Kuwait's three-month interbank rate rose to 4.93 per cent yesterday – 250 basis points higher its level on August 4, when bankers first said the central bank would no longer support currency trades.
The numbers
$3.7425: Cost of one dinar according to the central bank's reference rate yesterday, and $3.7313 on the interbank market, so investors get fewer dollars for each dinar on the interbank market