October 3, 2010 / 12:10 PM / 7 years ago

Iran's rial stays fragile despite central bank move

* Central bank unable to return rial to target value yet

* Iranians fear dollar shortage as sanctions bite

* Economists, exporters say currency over-valued

By Ramin Mostafavi and Robin Pomeroy

TEHRAN, Oct 3 (Reuters) - Iran’s currency, the rial, defied central bank attempts to revive its value on Sunday, remaining weak after falling 13 percent against the dollar last week.

Last week’s rial slump stirred talk of an unannounced policy of devaluation or a scramble for dollars amid fear of a scarcity in hard currency due to economic sanctions. But the central bank said later it would intervene to shore up the rial.

The retail exchange rate was 10,900 rials to the dollar on Sunday, softer than the 10,700 target set by the Central Bank of Iran after it pumped hard currency into the local market. [ID:nLDE68T1QB]

The rial picked up slightly on Saturday, but fell back again on Sunday, although not to its lowest point of 12,200 registered last Wednesday.

Several traders in Tehran were refusing to sell dollars, according to a Reuters witness. The semi-official Mehr news agency reported large queues of people trying to buy foreign hard currency, but traders told Reuters that things were calm and there had not yet been a run on the rial.

Central Bank Governor Mahmoud Bahmani said on Thursday the rial would return to a “normal” level of 10,600 per dollar this week. The bank had no shortage of hard currency, he said, urging Iranians not to flee the rial to buy foreign bank notes or gold.

RIAL OVERVALUED, ECONOMISTS SAY

Many economists believe the rial, which is loosely pegged to major world currencies under a “managed floating exchange rate”, has not been allowed to devalue in line with Iran’s inflation and is overvalued by between 30 and 50 percent.

Iran’s banks have been deliberately targeted by a new round of sanctions aimed at pressuring Tehran to rein in its nuclear activity, which the West suspects is aimed at making a bomb.

The Islamic Republic says its nuclear ambitions are peaceful and has played down the impact of the sanctions, which analysts say could limit its access to dollars and euros.

Traders in Tehran said on Sunday the Central Bank had not done enough to stabilise the exchange rate.

“Only a limited amount of forex has been injected into the banks,” said one money changer who asked not to be identified.

He said the central bank had asked traders to sell at 10,900 rials to the dollar but had not pumped out enough forex to do that. So he asked 11,300 rials to the dollar. Another one refused to trade at all.

“This price is false and the rate can change again. So I neither sell nor buy. You know, yesterday from dawn to dusk, the dollar rate fluctuated 500 rials,” he said.

A third trader who was selling dollars at 11,100 said some money changers were hyping the problem to increase profits.

“Today business is good,” he said, adding that the rial’s fall was “due to some of our colleagues who do not have a licence. They make a fuss to get benefit.”

Inflation is currently around 10 percent, according to the International Monetary Fund, down from 30 percent two years ago. But prices are expected to jump in the coming weeks when the government starts slashing subsidies on food and fuel.

Editing by Mark Heinrich

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