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U.S. Sanctions One Factor Among Many Behind Iran's Currency Slide

Wednesday, Jan. 4, 2012

Iran’s exchange rate is experiencing unusual volatility, with the U.S. dollar and the euro both rising by more than 25 percent against the Iranian rial over the past three weeks, despite attempts by Iran’s central bank to stabilize its currency. This volatility has coincided with the approval by the United States and the United Kingdom of a new round of sanctions against Iran targeting the Iranian central bank (ICB). The sanctions will deny access to U.S. markets to any firm that engages in financial transactions with the ICB. Since Iran’s commercial banks have already been targeted by similar sanctions, the focus on the ICB amounts to a blockade of Iran’s entire financial and banking sector, with potentially severe implications for Iran’s international trade. But while the new sanctions have played a role in the exchange-rate volatility, they are not the only factor. A cluster of domestic policy moves and private-sector trends have also played a major role in the rial’s slide.

The impact of the ICB sanctions so far has been primarily psychological, with relatively little direct disruption of financial transactions. There is an awareness among Iranian investors and households that these sanctions may interrupt the government’s oil revenues, the main source of hard currency for the entire economy. This concern has led to speculation that should Iran’s major oil clients be unable to pay for their purchases as a result of the sanctions, the flow of oil revenue could be delayed or disrupted. In either case, the Iranian government could have difficulty maintaining the exchange rate -- currently trading at close to 17,000 rial to the dollar -- and might have to devalue the rial in the future. This logic has induced some investors and speculators to convert their savings into U.S. dollars and other major currencies in anticipation of shortages in the coming months, driving down the rial’s value. ...

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