Iran currency slumps, central bank says to act

Iran currency slumps, central bank says to act

Central Bank says will act on Thursday.

September 30, 2010 9:21 by Reuters

Iran’s rial has fallen more than 10 percent in the last two days, prompting speculation about a shortage of hard currency in a country whose financial sector has been hit by international sanctions.

The dollar was selling for 12,200 rials on Wednesday, Mehr news agency reported, up from 10,850 on Monday. A Reuters witness said some dealers had stopped selling dollars at all, only offering to buy them. One newspaper said the dollar peaked at 13,000 rials on Tuesday.

On Wednesday afternoon the central bank governor appeared on television to reassure Iranians about their currency.

“I assure you from tomorrow (Thursday) the dollar will be offered at a much lower price,” Mahmoud Bahmani told students news agency ISNA.

“Part of the price hike was real, but the other part was unreal and the central bank will intervene to curb this false price hike.”

Iran usually keeps its money pegged to major world currencies on an informal basis, with the Central Bank of Iran selling currencies early in the morning to traders who then retail them with a certain mark-up.

“The foreign currency rate is set by the market,” Bahmani said, but acknowledged that the government played a key role in Iran’s “managed floating exchange rate regime”.

The dollar’s rise was accompanied by an increase in the price of gold, supporting the view that Iranians were moving their assets into “safe havens”.

Newspapers were full of speculation about the rial’s sudden slump. Many said money changers were having difficulty selling rials in the United Arab Emirates — a vital trading partner across the Gulf which has cracked down recently on some business with Iran due to international sanctions.

One newspaper said the drop in the rial might be a deliberate devaluation ahead of the massive cuts the government is about to make in subsidies it currently hands out to hold down prices of energy and other essential goods. The subsidy cuts are likely to have an inflationary effect.

Jam-e Jam newspaper said there may be a “psychological atmosphere in society to buy dollars and euros to be on the safe side in a possible decrease of the rial”. Adding to the problems, gold traders have been closing their shops in intermittent protests against an increase in value added tax, the latest sign of discontent among Iran’s politically influential merchant classes.

The sanctions, the toughest of which have been imposed by the United States and the European Union, aim to hit Iran’s vital energy sector and restrict its access to financial services — something which analysts say could make it difficult to access dollars and euros.

The measures are aimed at putting pressure on Tehran to curb its nuclear programme, which the West fears may be aimed at creating a bomb. Iran says its activities are purely peaceful and has called the sanctions illegal.

(Editing by Tim Pearce)