What is the reason for the decrease in the exchange rate?
What is the reason for the decrease in the exchange rate? According to Iran Gate, the currency rate has faced a significant drop over the past week, surprising many market participants. This sudden drop was so severe and unexpected that it prompted many to sell the dollars they had stored. But what is the reason for this drop, and how long will it continue?
The dollar price has returned to the 40,000 Toman range these days, whereas at the beginning of this month, it had even reached the 60,000 Toman range. The approximately 17,000 Toman drop in the free market exchange rate has led the supply side to surpass demand, worrying many participants in this field.
Why did the dollar become cheaper?
With the dollar on a steep decline, this question has arisen among market participants: what has happened that suddenly, after a sharp and extremely fast increase in recent weeks, we are witnessing such a heavy drop?
Traditionally, governments take actions to temporarily reduce the dollar rate in the days leading up to Nowruz, but this severe price drop was not something anyone expected. Evidence suggests that the Central Bank has managed to saturate the supply side significantly by accessing resources that are not yet clear to the media, overcoming the strong demand that existed.
On the other hand, some psychological factors have also exacerbated this trend, causing a significant portion of participants in this field to automatically release their stored dollars. Among the most important of these factors is the unexpected agreement between Iran and Saudi Arabia, which apparently was mediated by the Chinese, and the exact details of which have not yet been made available to the media.
Moreover, the government has managed to convince part of the public that there is a chance for the revival of the JCPOA, and efforts are underway in this regard. Rafael Grossi’s visit to Tehran also strengthened this possibility, and many were convinced that even if the revival of the JCPOA is not likely, at least efforts have been made to reduce tensions between the Islamic Republic and Western countries.
Price correction is natural
Financial market participants never forget one principle: the certainty of a price correction occurring after a sharp increase in rates over a short period. This correction usually happens to the extent of 10 to 15 percent of the growth and has always been predictable.
However, experts believe that this severe price reduction that has occurred in the Tehran currency market is not related to the principle of price correction in financial markets. As mentioned, several factors combined to intensify the currency price correction process, bringing the dollar rate back to the 40,000 Toman range.
In fact, it can be said that the government’s intervention in the currency market is clearly visible, and naturally, this intervention cannot continue indefinitely. Moreover, the psychological effects on financial market variables cannot continue their diminishing effect forever, and other variables will take their place in the short term. Therefore, it is said that what happened in the Tehran currency market last week was not a natural price correction process, and its continuation is unlikely.
Currency price forecast
As previously mentioned, the likelihood of the current price trend spreading to the activities of Tehran’s currency market participants in 2023 is very low. Among the most important reasons for this is the Central Bank’s severe limitation in accessing currency resources to artificially maintain the balance between supply and demand by injecting dollars into the market.
On the other hand, the psychological effects of the agreement between the Islamic Republic and Saudi Arabia also cannot influence the market indefinitely. In a country like Iran, where political developments occur at a very high speed, it cannot be expected that events will have uniform and permanent effects on market trends. Therefore, it is expected that with the slightest change in the foreign policy arena, we will once again witness price tensions in the market.
Experts also believe that the government is capable of stabilizing the dollar price in the 40,000 to 45,000 Toman range until Nowruz Eve and will continue its current policy of controlling prices for now.
However, considering the signals issued by Washington regarding Iran’s nuclear file, it is likely that we should expect the Islamic Republic’s efforts to revive the JCPOA to be blocked. This matter could also play a role as another trigger for another surge in the currency rate.
Moreover, the discussion of activating the ‘snapback mechanism’ could also arise once again after the current atmosphere subsides. If such an event occurs and this mechanism is activated by Western governments, we will certainly have to expect unprecedented currency rate surges in the early weeks of 2023.
Overall, given the current conditions observed in the markets, it is likely that the dollar price will fluctuate within its current range until the end of the year. However, with the start of the new year and its coincidence with Ramadan, it is expected that the situation will change, and once again, the price will be on an upward path.
Experts believe that the only factor that can prevent such an occurrence is a real and tangible change in President Raisi’s foreign policy, which has created the current conditions in the context of Iran’s economy. This policy now shows that the country’s economy is completely dependent on it, and the slogans of the thirteenth president about not tying the economy to the JCPOA lacked logical support.