KUWAIT/LONDON, May 11: Kuwait revalued the dinar for the first time in 17 months on Thursday, sparking a rally in regional currencies and intense market speculation that Saudi Arabia, the world’s top oil exporter, would follow.

A central bank spokesman said the Kuwaiti dinar had been revalued for the first time since January 2005 to allow a 1 per cent appreciation against the dollar.

The dinar, which like other currencies in the world’s main oil exporting region is pegged to the dollar, strengthened to 0.2891 to the dollar from 0.2920 a day earlier.

Kuwait, Saudi Arabia and their four neighbours of the Gulf Cooperation Council, which supply a fifth of the world’s oil needs, are working towards currency union in 2010. Speculation swept regional markets that other countries may follow suit.

It makes sense as all of them are facing substantial inflows which they are having to sterilise to dampen inflation, said Richard Fox, sovereign credit analyst at Fitch Ratings.

The issue now is what the other GCC countries may do and if this is a precursor to a more flexible GCC currency.

Central banks across the Gulf were closed on Thursday for the Muslim weekend. A Qatari central banker said the country had no plan yet for a revaluation. Officials in the United Arab Emirates and Oman declined to comment.

The Gulf states, all staunch US allies, also came under rare public pressure from the United States this year to address their mounting current account balance of payments surpluses.

This is consistent with the G7 communiqui, said Dwyfor Evans at Bank of America. If you’re going to revalue, it makes sense to do it when oil is above $70 a barrel.

Kuwait usually matches US Federal Reserve rate changes within days but has not followed the last few moves

It has so far left the benchmark dinar discount rate unchanged at 6 per cent after Wednesday’s 25 basis points Fed hike but raised its repo rate to 5.625 per cent, an increase of 0.25 per cent.

The Saudi riyal surged 100 ticks against the US dollar hitting day’s high of 3.7414, up around a quarter per cent, after closing at 3.7503 on Wednesday.

Steve Brice, Middle East Economist at Standard Chartered Bank in Dubai, said the Saudi appreciation was driven by hedge fund activity in the riyal forward market, which started after the central bank failed to match the last Fed move.—Reuters