(MENAFN- Arab Times) The Kuwaiti dinar (KD) has strengthened somewhat over the last few months, in large part due to the stronger dollar. The dinar, which is pegged to a basket of major currencies, has declined against the USD since June; however, it has moved up against all other major currencies, and as a result strengthened overall.
The currency's nominal effective exchange rate (NEER) has increased by around 2.6% since June. The NEER, estimated by JP Morgan's KD index, is an index of major currencies weighted by their importance in Kuwaiti trade. Around 20% of Kuwait's imports come from the Eurozone, 10% from the US and another 8% from Japan. A large part of the rest comes from countries whose currencies are closely tied to the US dollar.
The KD has appreciated against most major currencies by around 5-11% since June, though it has slipped against the US dollar. The dinar has declined against the USD by 3.4% since June, falling from 3.55 USD/KWD to 3.43. At the same time, it has gained against the euro by 6.2%, the yen by 11% and the pound by 5.5%.
Recent movements in exchange rates are largely a reflection of changes in monetary policy in major economies. The dollar and foreign exchange markets have finally made large moves driven primarily by central banks' diverging policies. The US Federal Reserve has finally ended its QE3 program (quantitative easing), thus paving the way to higher official interest rates for the US dollar sometime in second half of 2015. The Fed's updated policy stance reflects a now much healthier US economy, poised to grow 3% in the second half of this year.
The US growth contrasts with the two other large economies that are struggling: the Eurozone and Japan. Very weak growth in the Eurozone and a (technical) recession in Japan by 3Q14, alongside deflationary pressures are forcing the central banks to renew their stimulative efforts. As the Fed tends toward the end of monetary easing, others are becoming more aggressive. Result: both currencies are down against the dollar, but the Japanese Yen more dramatically so than the euro.
A stronger KD should help keep inflation low. Inflation is running at around 3.2% in Kuwait and is expected to remain relatively modest in 2015. The dinar's strength should help keep a lid on price growth. A 1% increase, if sustained over time, in the KD's value (index basis) could result in a 0.25-0.5% percentage point decline in the inflation rate.
The impact of a stronger dinar on the trade surplus is expected to be positive. Oil exports will rise as the dinar declines against the dollar. Meanwhile, imports will decline as a stronger KD results in a smaller import bill; while demand for imports is likely to rise as goods become cheaper and thus more attractive, this increase tends to be smaller than the drop in prices.
The stronger dollar will also have a small positive impact on government revenues. We estimate that a 1% decline in the USD/KWD rate adds around KD 250 million to state revenues, or 0.5% of GDP.
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