Kuwait signalled it had quashed speculation about a rise in the dinar on Tuesday, by reversing its first currency depreciations in at least four years and easing pressure on lending rates among banks.

The oil exporter's central bank allowed the currency to rise 0.16 percent to trade around a mid-point of 0.28200 per dollar, returning the dinar's reference rate to that set on July 25, before two depreciations on Thursday and Sunday.

The central bank also resumed sales of short-term certificates to banks after suspending them two months ago to discourage investors anticipating an appreciation of the dinar, currency traders at banks in Dubai and Kuwait said.

'The central bank is happy,' said Steve Brice, Standard Chartered Bank's Middle East economist. 'The move suggests that it has squeezed out speculators from the market.'

The central bank has been trying to deter bets on dinar appreciation for much of this year, cutting key interest rates and the coupon on its bonds in the runup to a revaluation on May 20, when it dropped its peg to the tumbling dollar.

As investor piled into dinar deposits, the central bank said on May 27 it had stopped selling the certificates it used to set the one-month intervention rate.

The certificates are the main instrument through which the central bank takes in short-term dinar deposits from Kuwaiti banks. Interest rates tumbled on the interbank market after the suspension as banks tried to lend those funds among themselves.

The central bank told banks on Tuesday that they could start buying one-month certificates, currency dealers at banks in Kuwait and Dubai said.

'They did it because they felt that there is no speculation on the dinar, things are back to normal,' said one of the Dubai-based traders, who asked not to be named.

The one-month Kuwait Interbank Offered Rate rose to 4.5625 percent on Tuesday from 3.8750 percent early on Thursday, when the central bank allowed the dinar to depreciate for the first time since at least 2003.

Interbank rates have been rising since the depreciation as investors converted dinar deposits into dollars, realising the Kuwaiti currency was no longer a one-way bet.

That depreciation and another that followed on Sunday could simply have been designed to deter bets on dinar depreciation, Giyas Gokkent, head of research at National Bank of Abu Dhabi, said in a note this week.

The dinar weakened to a day low of 0.28241 per dollar. On Wednesday it hit an 18-year high.

Other analysts, including Brice, see the changes in the dinar's reference rate on four of the last five trading days as a sign the central bank has started tracking moves on global currency markets.

The dollar drifted lower against most currencies on Monday as investors shunned the US currency over fears of deteriorating credit markets.

'The dollar lost some ground yesterday so we expected to see the dinar rise,' said Simon Williams, economist at HSBC, adding the appreciation was a little larger than he had expected.

Central Bank Governor Sheikh Salem Abdul-Aziz al-Sabah said on Sunday the basket gave the bank flexibility to track moves on global foreign exchange markets, state news agency Kuna reported.

The dinar has now gained 2.53 percent against the dollar since May 19, the day before the central bank started tracking a basket of currencies it refuses to name.

The central bank blamed rising inflation on the dollar's slide, saying it was making some imports more expensive. The dollar hit a record low last week against the euro, in which Kuwait pays for more than a third of its imports.

Inflation in Kuwait rose to 5.37 percent in April from 5.15 percent in March. Williams expects inflation to peak at around 6 percent at the end of June given the rising dinar and interest rates. - Reuters