Dollar Stroke; Why Did the Currency Market Fail to Increase?

Why has the continuous increase in the price of the dollar stopped? Why has the dollar been priced slightly lower than its peak days after rate adjustments? These questions, or questions around this topic, are not related to whether you have been an active player in the currency market or not. It doesn't even matter if you converted your assets to dollars during the dollar's soaring period or were merely a spectator of its unprecedented record-breaking. Understanding the future price of the dollar or at least tracing the roots of the recent price drop is a significant topic these days. To analyze why the dollar has experienced a different trend in recent days compared to previous weeks and months, one must look beyond the economic sphere. The increase in the dollar price in recent months was also the result of various sectors aligning with the economy, from foreign policy and diplomacy to the overwhelming liquidity flowing through the veins of the Iranian economy. The Central Bank, the main market maker, is part of the factors affecting the fluctuations in the price of the dollar and other currencies, which can be attributed to the economic structure of Iran. The undeniable reality is that whether the dollar price rises or falls based on the market's supply and demand mechanism is the result of a decision made by the largest holder of foreign resources, namely the Central Bank, as the biggest market maker. There is no precise information on the Central Bank's procedures for supplying dollars to the market in recent months, but it can be inferred that the Central Bank has recently decided to intervene in the currency market, especially the free currency market, and has adjusted prices by increasing supply. Evidence supporting this theory can be seen in the directives issued by this bank last week, compelling banks to buy and sell currency, expanding the powers of licensed currency exchange networks, efforts to normalize conditions in the free currency market, identifying new non-commercial currency needs, recognizing expenditures that previously had no response, and delegating more powers to the Central Bank, as emphasized in a joint meeting of the heads of the branches of government, all indicate a more pronounced presence of the Central Bank and the intervention of this major player in the market. However, a question arises: why did the Central Bank not intervene in the market in the past months, prior to the prices reaching peaks of 18 or 19 thousand tomans? The simple answer to this question is the Central Bank's mistake in assessing the supply and demand of the free market or the impact of this market on economic activities. It can be assumed that economic planners believed that the secondary currency market or the Nima system could impose its power on the free currency market, which officials claim constitutes one to three percent of the total market and believe that this market cannot determine prices in other markets. However, it has now become clear that this was not the case, and it was, in fact, the prices in the free market that became the basis for pricing other goods and services. This question can also be answered by stating that the economy is a realm of different choices, or in other words, a stage of competition among existing preferences. Perhaps economic planners were previously so concerned about the future supply of currency for essential needs, such as providing basic necessities and essential goods, that they were willing to sacrifice the order of the free currency market to preserve and protect their oil dollars for the days following the second phase of sanctions. Typically, the demand in the free currency market is speculative or precautionary, and the government and the Central Bank have come to the conclusion in recent months that they should not auction their precious foreign currency resources to meet these needs and what they considered 'non-essential' or 'speculative' demands. This approach can be observed in the rhetoric of Abdolnaser Hemmati, the Central Bank Governor, and his 'honor' interpretation of the bank's foreign resources, or the repeated assertions of Hassan Rouhani about preserving and safeguarding the Central Bank's resources. For whatever reason, the government and the Central Bank may have distanced themselves from this previous approach and analysis, the intensifying political, economic, and social pressures resulting from the unprecedented depreciation of the national currency, or perhaps the new European strategy for opening a path for banking and monetary transactions in the aftermath of U.S. sanctions against Iran, are among the factors influencing this change in approach. The most important factor in the increase in the exchange rate in the free market in recent months has been the growing concerns about the future of the rial, which led holders of bank deposits or other rial-based assets to the analytical conclusion that to protect themselves from the depreciation of their rial assets, they should quickly convert their assets to dollars to insure them. However, this ongoing increase in the price of currency, especially the dollar, lasted for months and gradually reduced the pressure from such demands. On the other hand, the dollar reaching its peak price and the continuous increase in the price of this currency made a price correction necessary. In this imbalance, the government's and Central Bank's pressures to keep prices low on one side and the pressures of inflationary expectations and precautionary and speculative demands for buying dollars on the other side, which pushed prices to increase further, made finding a point of calm or relative temporary equilibrium necessary for this market. The supply of some household dollars to the market, which buyers had purchased in previous months with the aim of profit, may have been effective in adjusting prices in recent days, but it is unlikely that this supply was proportionate to the excessive news reporting we have witnessed recently. Alongside the relative decrease in prices in the currency market, many news channels on social media and even some media reported on the influx of sellers into the market to sell the dollars they had purchased in previous months and their losses, which seems more like a coordinated effort to shape the market rather than reflecting the existing reality. Although it is always the case that prices increase in markets and bubbles form in various markets, with amateurs entering the market at the worst times to buy at high prices and exiting at the worst times to sell at low prices, what has occurred in recent days represents the other side of the coin of reporting price increases in the market that recognized no temporal or spatial limitations. Just as the nighttime price increases during holidays reported by some media had no relation to reality, the narratives from some other media about the nighttime influx of sellers into the market to rid themselves of dollars also did not reflect the existing reality. The policy on the exchange office boards must undoubtedly be linked to the influence of political and international factors. Every verbal clash between the leaders of Iran and the U.S., every reaction among politicians in Tehran-Washington, and even in European capitals, had a counterpart in Istanbul's crossroads in Tehran and Monouchehri Street. Therefore, part of the price decrease can also be analyzed from this perspective, with messages indicating the approval of bills related to joining the FATF convention and other bills related to money laundering and financial assistance to terrorism in the Islamic Consultative Assembly, the publication of news about the new European design for maintaining banking and monetary relations with Iran, the summary of the Iranian President's trip to New York, and the ruling of the International Court of Justice in the case of Iran's complaint all potentially sending positive signals to the currency market for relative stability in the future. However, equally, one can mention and refer to statements that had a reverse effect on this market. The U.S. withdrawal from the Friendship Treaty with Iran, the implicit opposition of Ayatollah Khamenei's website, the leader of the Islamic Republic of Iran, to the approval of FATF bills, and the statements of members of the Expediency Discernment Council rejecting these bills are signs that could have an increasing effect on the free currency market. Among the less significant and narrower factors that have influenced the free currency market in recent days, one can also refer to the end of the season for foreign travel and the relative decrease in such demands in the market. The incomplete stroke will repeat itself, but whether this stroke continues in the currency market and the trend of the dollar price continues to decline, creating a new balance in the free currency market at lower levels, depends on fundamental factors, some of which have been mentioned. Most importantly, it is the role that the Central Bank, as the main market maker and major player in this market, will choose for itself, announcing a transparent mechanism for determining currency prices, clarifying the volume and depth of intervention, and outlining the medium-term horizon envisioned by policymakers in the economic sphere, all of which are part of this role determination. Although in this context, the Islamic Republic's decision to resolve its outstanding issues with the surrounding world and the role envisioned for Iran in the world of politics and economics will also be decisive in how the free currency market behaves in the future. Until then, the repetition of such ups and downs, strokes, confusions, and disarray with even greater intensity on both sides of increases and decreases will not be far from mind, fluctuations and disarray that are considered deadly for investment and economic activity.