Why is Iranian Rial suddenly Weakening?

By for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

A recent devaluation of the rial on the so-called free market in Iran has raised concerns that the country’s economy will experience another collapse of the value of its national currency similar to what happened in 2012. The free market rate of the US dollar surpassed the psychological mark of 40,000 rials in early October.

In early December the rate had reached rial 42,000. In the same period, the official interbank rate, which is set by the Central Bank of Iran (CBI), went from 33,741 rials on Oct. 2 to 35,328 rials on Dec. 6 — close to a 5% drop in value.

The easy explanation for this phenomenon is that the devaluation was a psychological reaction to US President Donald Trump’s outlining a new antagonistic strategy toward Iran and his decertifying the Joint Comprehensive Plan of Action nuclear deal in October. However, while political and psychological factors play a significant role, there are also other drivers that need to be understood.

The key stakeholder in the determination of the exchange rates is the CBI, both because it governs monetary policy and is the only buyer of the government’s hard currency revenues. Hence, it is also the main supplier of hard currency to the market, including the free market — that is, foreign exchange bureaus.

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