Bahrain dinar under pressure

MANAMA/DUBAI: The Bahrain dinar fell to a multi-year low in the forwards market on Wednesday and the central bank was forced to move to an alternate location after a security crackdown on protesters closed the commercial district.

One-year dollar/dinar currency forwards, which capture expectations for the dinar to depreciate over the next 12 months, were quoted as high as 200 points, the highest level since at least the year 2000, a senior bank trader said.

The spot rate briefly weakened away from the peg to the U.S. dollar , dropping as far as 0.37716, because of security fears and uncertainty over whether the central bank was operating, traders said.

The dinar then bounced back to 0.37695 after the central bank intervened to supply dollars.

"In the dollar/Bahraini dinar forex market, activity has declined considerably, and most transactions are limited to spot and very short-dated swaps," said Mazen Barbir, forex dealer at Standard Chartered in Dubai.

"The offer on USD/BHD has widened to 0.3772, basically 20 pips over the central bank offer. Pressure for dollar buying will continue as investors will seek to exit liquid investments," he said.

At their quoted high, one-year currency forwards implied that the Bahraini dinar would depreciate by roughly 0.9 percent from its 0.376 peg to the dollar over the next year.

The 200 point level was up from a close of 75/150 points on Tuesday.

Traders, who use the forward markets to bet on the future direction of currencies, said there was currently no real interest in dealing in forwards.

Bahrain's currency link to the dollar makes its central bank's policy less flexible as it needs to keep its interest rates near U.S. benchmarks to avoid excessive pressure on the currency.

Manama's commercial district that houses the central bank has been closed off since early on Wednesday as Bahraini forces clamped down on protesters, cut off roads and cleared hundreds from a protest camp in the capital of the small non-OPEC oil producer.