The Kuwait central bank has stopped offshore banks from making bets on the daily movement of its dinar currency through Kuwaiti banks, a move designed to clamp down on speculators, bankers and traders said yesterday. Local banks in the Gulf state have been notified that they are allowed to buy or sell US dollars only from the central bank for commercial purposes, the bankers in Kuwait and Dubai said.
The move intends to stop local banks from using the dinars they buy from the central bank to provide liquidity to offshore banks and speculators wanting to take positions on the Kuwaiti currency, a common practice, they said. "I'm presuming they want to stop speculation on the dollar-dinar daily fix," said Jason Goff, head of group treasury and market sales at Emirates NBD, the largest Gulf Arab bank by assets. Banks have been speculating in that market and the central bank wants to control FX flows," he said.
The central bank did not immediately comment when contacted. Kuwait dropped its dinar's peg to the US dollar in May 2007 in favour of a basket of currencies, and the central bank now adjusts the currency's reference rate versus the dollar every morning at 0800am local time.
The central bank has not disclosed the composition of its basket, saying only it is comprised mainly of dollars.
This has allowed currency traders to take positions on the dinar based on how the dollar performed against global currencies a day earlier, traders said.
"The new rule has been implemented for two or three days now," said a foreign exchange trader at a Kuwaiti bank.
"It had already been in place a couple of months ago. Then they stopped it and are now implementing this again," the trader said.
Trading in the Kuwait dinar spot has dried up after the move, which has created an illiquid offshore market for trading in dinars, traders said. One Dubai currency trader said the Kuwait dinar market was now "dead", saying the spread on the dollar-dinar would widen as a result and liquidity would only dry up further.