Kuwait May Dump the Dollar to Protect Its Economy

In an earlier post, I wrote about how the euro is gaining popularity as countries begin to reduce their dependence on the U.S. dollar. Last Wednesday, Kuwait announced that it may abandon the dollar, in favor of a basket of currencies, to protect its economy. This decision is being studied by Kuwait's central bank.

Kuwait is currently the third-largest Arab oil producer, and it has pegged the local currency (the dinar) to the U.S. dollar. However, this dollar-peg has been harmful to Kuwait's economy. Without the peg, the dinar would have appreciated in value, due to the increase in oil prices.

According to Deutsche Bank, most of the currencies of the six Gulf Arab states, including Saudi Arabia and Kuwait, are undervalued against the dollar. Bloomberg has a very good article on Kuwait's decision to reduce its dependence on the U.S. dollar. The article notes:

The U.S. needs to attract about $2.5 billion a day from foreign investors to keep the dollar steady and fund a current account deficit that widened to a record $225.6 billion in the third quarter of last year.

I expect more countries to start moving away from the dollar. Kuwait is only the beginning.