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THREATS AND PERSUASION—Why Iran’s government is likely to win the battle of wills over currency

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Analysts said the government's likely response to the stand-off would be to shift more currency trade out of the market and into official channels.

October 9, 2012 10:15 by



At the same time, over two dozen people have been arrested on charges of manipulating the currency market – widely seen as a warning to dealers of the consequences if they quote the rial at weaker rates than those proposed by the authorities.

 

Traders are unwilling to lose money by selling dollars at such prices, but also fearful of official displeasure if they sell at other prices. So most free-market trade in the rial in Tehran and across the Gulf in Dubai, a major centre for business with Iran, has shut down, dealers in both cities say.

 

“If you go to Iran now it will be really hard to find U.S. dollars – you have to buy them in the black market,” said an Iranian currency dealer in Dubai, declining to be named because of the political sensitivity of his remarks.

 

Analysts said the government’s likely response to the stand-off would be to shift more currency trade out of the market and into official channels.

 

Earlier this year it fixed an official “reference rate” of 12,260 rials at which the central bank sells Iran’s petrodollars to importers of some foods and medicines that are designated as essential goods. Last month it created a foreign exchange centre to serve importers of basic goods, such as industrial materials.

 

Already there are signs these official channels are being expanded. On Friday Iranian media reported the exchange centre would cover a wider variety of basic goods, such as olive oil.

 

On Monday, state television quoted Industry Minister Mehdi Ghazanfari as saying the centre, now quoting a dollar rate of 25,550 rials, would begin providing hard currency to more categories of people requesting it, including students studying overseas and patients going abroad for medical treatment.

 

“The exchange centre can soon take a lead role in determining currency prices in the free market,” he said.

 

RESERVES

 

It is not clear, though, whether the government will over the long term have enough hard currency to satisfy all demand through its official channels, especially if sanctions cut its exports far enough to push its trade balance into deficit.



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