Another Surge of the Dollar in Tehran's Currency Market: Roots and Questions

The dollar rate in Tehran's free currency market, which had been fluctuating around 3500 tomans for several consecutive months, began to increase relatively gently about a month ago and has recently surged past 3800 tomans. Initially, the rising fluctuations in Tehran's currency market were attributed mainly to the large number of pilgrims heading to Iraq for the Arbaeen ceremonies, which naturally increased the demand for currency and raised its price. The impact of the Emirati dirham was also noted, as the price of this currency, which plays an important role in Iran's economic activities, typically rises in the final weeks of the Christian year, affecting other currencies in the Tehran market. The role of such variables in the fluctuations of Iran's currency market, including in recent weeks, cannot be ignored. However, the persistence and especially the acceleration of the dollar's rise in recent days indicate that stronger factors are at play, creating a gap of six hundred tomans between the official dollar rate (3210 tomans) and its rate in the free market. The latest influencing factors on Tehran's currency market can be summarized as follows: 1) The rise in the dollar price in Tehran's free currency market has been more significant than other currencies, which is entirely natural. This process originates from developments in the global currency market. In fact, the strengthening of the US dollar against other currencies continues and may intensify in the coming months for at least two reasons. The first reason is that it is seriously predicted that the US Federal Reserve will raise the base interest rate after months of hesitation, a move that, if realized, will lead to an even greater increase in the value of the dollar against other currencies. The second reason is the positive reaction of financial markets to Donald Trump's victory in the US presidential election, which has naturally strengthened the greenback. It is highly likely that the elected president of the United States also wishes to keep the dollar high in his first year in office to demonstrate that he has created a sense of confidence for the US economy and national currency. The combination of these factors has effectively brought the dollar's value close to that of the euro, and it is even possible that the euro will weaken against the dollar in the near future. Naturally, Tehran's currency market will not remain immune to these fluctuations, and the hierarchy of major world currencies, in terms of their exchange rates against the rial, will undergo changes in this market. 2) Trump's rise in US politics also negatively affects Iran's national currency from another aspect. The explanation is that following the resolution of the nuclear program and the signing of the JCPOA, hopes were strengthened that Iran's access to foreign currencies, especially the dollar, would significantly increase. In fact, the Iranian government hoped to increase oil production to as much as six million barrels per day and to attract a flood of foreign investments into Iran, events that could stabilize Iran's national currency. Given the severe criticisms of the elected US president against the JCPOA, fears of a change in Washington's future policy regarding this agreement have risen, and this fear naturally destabilizes the position of Iran's national currency. Players in Iran's currency market naturally adjust their strategies based on the outlook of Tehran-Washington relations, which currently does not seem very promising. 3) The poor state of the global oil market and its not-so-favorable outlook is also not in favor of Iran's national currency. In fact, all oil-producing countries are facing a shortage of dollars, from Nigeria and Algeria to Venezuela and Iran. Given this shortage, fears of the expansion of the black currency market in all these countries are rising unless positive movements occur in the global oil market. Iran's currency market also reflects the shock resulting from the unfavorable oil market situation. 4) Some observers of Iran's currency market consider the serious fight against money laundering as one of the factors increasing the dollar price in Iran. The explanation is that the Islamic Republic, if it wants to improve its relations with the international banking system, must carry out reforms in the fight against money laundering and the financing of terrorism. However, stricter measures in the fight against money laundering, from the perspective of those observers, dry up a significant part of the supply source for Iran's currency market, and with the reduction of the supply of 'dirty money' to this market, including from the UAE, the price of currency in this market rises. In explaining the recent fluctuations in Tehran's currency market, all these factors must be considered. However, the main and always influential factor on the exchange rate, which should not be forgotten, is the level of inflation in Iran and its difference from the average inflation rate in trading partner regions with Iran. Experience over the past three decades has shown that the government in Iran, as much as it can, prevents the increase in the exchange rate by injecting dollars into the market. But if the tables turn and the government, due to sanctions and the fall in oil prices, can no longer inject dollars into the market, the 'currency spring' will be released, the price will rise sharply, and Iran's fragile economy will suffer devastating shocks. This situation has occurred many times. The official inflation rate in Iran, as reported by the Statistical Center and the Central Bank of the Islamic Republic, rose to forty percent in the years 1390 and then gradually decreased, so that it currently fluctuates around eight to nine percent annually. In contrast, the inflation rate in the euro area, dollar area, and yen area during the same period has been below two percent. This difference in inflation rates between Iran and the most important currency regions in the world cannot fail to affect the value of Iran's national currency. A currency system based on market actions does not prevent the adjustment of the exchange rate based on inflation. In countries equipped with a floating exchange rate system, this adjustment occurs automatically based on the supply and demand for currency. Iran's currency system has been described as 'managed floating.' It would not have been a problem if this 'management' rationally adjusted the exchange rate based on the difference between domestic and foreign inflation. In practice, things proceed differently. In fact, the term 'managed' in Iran has been incorrectly interpreted as the artificial stabilization of the exchange rate, meaning that the Islamic Republic government, as much as it can, prevents the decrease in the exchange rate based on reality by injecting currency into the market and other manipulations, or, in other words, keeps the currency artificially cheap as much as possible. By artificially stabilizing the exchange rate, the goal of the Islamic Republic government is to keep imported goods cheap to prevent inflation from rising. Experience over the past three decades has shown that the government in Iran, as much as it can, prevents the increase in the exchange rate by injecting dollars into the market. But if the tables turn and the government, due to sanctions and the fall in oil prices, can no longer inject dollars into the market, the 'currency spring' will be released, the price will rise sharply, and Iran's fragile economy will suffer devastating shocks. This situation has occurred many times. It seems that Hassan Rouhani's government has also not abandoned the method of artificially managing the currency market, a method that makes imports cheaper and, conversely, raises the prices of the country's export goods and takes away their competitiveness in foreign markets. Iran is among the few countries in the world that, by artificially maintaining the value of its national currency and preventing its adjustment based on market realities, effectively subsidizes imported goods and, conversely, punishes exporters. In contrast, countries like China subsidize their exports through a competitive currency policy and prevent imports. Given the proximity of the presidential elections, there is a risk that the eleventh government will try to prevent the rise in the exchange rate as much as possible. Apparently, Hassan Rouhani and some of his advisors have concluded that the weakening of the national currency could harm the president's position in the upcoming elections. Does the Central Bank currently have the necessary tools and barriers to defend the national currency at any cost? Economic realities send another message. In fact, neither absolute support for the increase in the value of the national currency makes sense nor absolute support for its decrease. What matters from the perspective of national interests is to adopt a currency policy that serves the country's development.