The Kuwaiti dinar (KD), which is pegged to a basket of major currencies, has strengthened somewhat over the last few months, in large part due to the stronger dollar, according to a report by the National bank of Kuwait (NBK) on Wednesday.
The dinar has declined against the USD since June; however, it has moved up against all other major currencies, and as a result strengthened overall, the report explained.
The dinar's nominal effective exchange rate (NEER) has increased by around 2.6 percent since June.
The NEER, estimated by JP Morgan's KD index, is an index of major currencies weighted by their importance in Kuwaiti trade, it said.
Around 20 percent of Kuwait's imports come from the Eurozone, 10 percent from the US and 8 percent from Japan, the NBK report said. 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 percent since June, though it has slipped against the US dollar by 3.4 percent over the same period, falling from 3.55 USD/KWD to 3.43. At the same time, it has gained against the euro by 6.2 percent, the yen by 11 percent and the pound by 5.5 percent, the report added.
The NBK weekly report noted that the recent movements in exchange rates are largely a reflection of changes in monetary policy in major economies. The US 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 percent in the second half of this year, the report stated.
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.
A stronger KD should help keep inflation low. Inflation is running at around 3.2 percent in Kuwait and is expected to remain relatively modest in 2015, the report said.
The dinar's strength should help keep a lid on price growth. A 1 percent 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, it explained.
In addition, the report0 expects 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 percent decline in the USD/KWD rate adds around KD 250 million to state revenues, or 0.5 percent of GDP, the report concluded.