Often, reports about the plunging value of the rial suggest that the appreciation of the dollar in the free market reflects the erosion of Iranian purchasing power. When ordinary Iranians exchange rials for physical dollars, they are acquiring an asset that they will most likely exchange back into rials at some future point, preserving the value of their savings in the process.
Iranians purchase dollars for the same reason they purchase gold, real estate, and even used cars—they are seeking a hedge against inflation. Hard currency dollar appreciation does not depress the value of the rial as a medium of exchange.
However, the free market rate could be a signal for price makers about expectations of future inflation, and therefore may influence producers and retailers to increase prices. Moreover, the free market rate may also have an impact on the price of real estate, which is also used as a hedge against inflation. In both instances, the devaluation of the rial in the free market could contribute to higher prices for Iranian households. But when considering that the free market represents a small proportion of the overall foreign exchange market in Iran, fluctuations in the free market rate are perhaps best understood as a response to inflation, among other economic indicators.
In fact, at a time when the central bank is pumping historic amounts of liquidity into the Iranian economy, the conversion of rials into dollars may actually serve to absorb some liquidity.
This is perhaps the other parallel that can be drawn between the purchase of dollars and assets such as stocks and gold—the currency free market has some of the hallmarks of a bubble, particularly as the spread with the rates available on the NIMA exchange widen. Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author s and do not necessarily reflect the views of Carnegie, its staff, or its trustees. In an increasingly crowded, chaotic, and contested world and marketplace of ideas, the Carnegie Endowment offers decisionmakers global, independent, and strategic insight and innovative ideas that advance international peace.
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Follow Us. All rights reserved. The recent hike in dollar's value has put the currency's gain against rial at about 55 percent since the beginning of the current Iranian calendar year that started on March Market observers have blamed the instability of currency in Iran mainly on U. The sanctions have even made it almost impossible for the Islamic republic to have access to its currency resources in the international banks. The average price per square meter in Tehran has increased just 12 points over the last Iranian calendar year, which corresponds to a unique situation in the market whereby recent price increases are not being driven foremost by greater demand, but rather a new hesitance among sellers to liquidate their assets and thereby gain exposure to currency depreciation.
Taken together, the relative stability of the inflation rate and the average price of housing suggests that the purchasing power of the rial remains relatively stable for daily consumption. As such, the recent devaluation bucks the generally accepted explanation for short-term currency depreciation.
Research by economist Abbas Valadkhani seeks to establish the principal drivers of the open market exchange rate using annual time series data from to So why have Iranians begun to turn to hard currency and gold, driving exchange rates to historic highs?
The explanation lies in that this is an investment behavior. The ability to generate wealth in an otherwise weak economic environment is a skill honed mainly by the upper middle class over decades in order to hedge against stagnant wages, rising prices and general uncertainty. It stands to reason that these investment skills are coming into play in a new way and that what was once speculation pursued in times of macroeconomic weakness is now being pursued absent — or in advance of — such weakness.
Thus, what we are witnessing looks more akin to a bubble.
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