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(MENAFN - The Peninsula) Doha • Kuwait's move to de-link its currency from the dollar has not come as a major surprise, says a senior London-based banker who has considerable exposure to the Middle Eastern markets.
Kuwait has in the past acted independently, Dr Gerard Lyons, Chief Economist and Group Head of Global Research, Standard Chartered Bank, London, said yesterday.
"It was rumoured for some time that Kuwait could do so (unshackle its currency from the dollar)," Lyons said in remarks to The Peninsula on the sidelines of the Second Qatar Economic Forum which ends here today.
The move will provide Kuwait greater flexibility in the future but it needs to keep the components of the basket (of the currencies to which the Kuwaiti dinar will be pegged) a secret.
Prior to 2003, the Kuwaiti currency was weighted to the extent of 85 per cent to the dollar in its pegging to a basket. This time the percentage might be slightly lower, suggested Lyons.
The timing of the Kuwaiti move is significant since it coincides with China widening its currency band on Friday and a heightened debate on an appropriate monetary policy raging in South East Asia.
Many of these countries have intervened aggressively to ensure that their currencies do not appreciate against the dollar. This will give them room to manoeuvre their domestic monetary policies.
The global environment is changing very fast and new trade corridors are emerging.
Intra-Asia trade is rising and trade between Asia and the Middle, Asia and Africa and other regions are galloping too.
About Qatar and other Gulf countries whose currencies are pegged to the dollar, Lyons said it is difficult for them to do away with the pegging unless their economic diversification efforts to reduce their reliance on hydrocarbon resources are very successful.
Energy is priced in dollars and attracting foreign direct investment (FDI) is the key to their economic diversification effort, said Lyons.
"Qatar's economy looks good. The policies look sound. We are very positive about Qatar."
Lyons, however, outlined a few disadvantages of the pegging and said, as for Qatar, the irony is that its economy is booming while that of the US is witnessing a slowdown.
"When you tie your currency to that of another country, you are tying your monetary policy to that country," he explained.
Qatar, he said, needs to deepen its capital markets to manage liquidity levels.
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