Why Iran's currency dropped to worst low in two decades

Second major shock to Iranian markets

Monday's drop in Iran's currency value was the second major shock to Iranian markets in the past few weeks.

In late December, the rial dropped 10 percent in less than a day after Iran's semi-official Mehr News Agency reported that Iran's Central Bank had ordered local businesses to stop using the Emirati dirham for financial transactions. That report cited Iran's ambassador in the Emirate of Abu Dhabi as saying that Tehran's Trade Promotion Organization would no longer allow registration for imports routed through the UAE, Iran's third-largest trading partner.

Tehran's market exchange rate quickly stabilized to just above 13,800 rials to the dollar after Iran's Foreign Ministry formally denied any trade cuts with the UAE or halts in registration, and the reports were removed from Mehr's website.

Financial experts inside the Islamic Republic say the added political shock of the new US legislation means that although Iran's market rate for the rial will stabilize, likely in the next few days, it won't recover back to the 14,000 rials-to-the-dollar range it was at last week.

Defiant regime, desperate public

The Iranian government has remained defiant in the wake of Washington's latest sanctions over Tehran's controversial nuclear energy program. Tehran announced the production of Iran's first nuclear fuel rod, has threatened to choke off the vital Strait of Hormuz – through which nearly one-fifth of global oil shipments pass – in the case of embargoes against Iranian oil, and is conducting naval war games, including the test-firing of new missiles.  

“The government is trying to show the world they're still strong and capable of doing big things,” says one prominent merchant in Tehran's grand bazaar.

Nevertheless, Tehran has simultaneously sought to temper its recent aggressive posturing, renewing calls on Dec. 31 to restart negotiations over its nuclear program with the so-called P5+1 powers. That group includes the five permanent members of the United Nations Security Council – the US, Britain, France, China, and Russia – plus Germany.

Domestic analysts say that while President Mahmoud Ahmadinejad's government is eager for new nuclear talks, the regime as a whole isn't likely to tone down its demands to negotiate on an “equal footing” with the economically and politically stronger P5+1 powers, and will surely maintain the government's now-trademark defiant tone. 

Ordinary Iranians are likely to bear considerable financial pain as the economic situation in Tehran becomes increasingly desperate.

"On the streets of Tehran the money exchangers are also under pressure," says Professor Askari of George Washington University. "If another spark occurs, there is really no limit on where the rial could go."

Follow Roshanak Taghavi on Twitter at www.twitter.com/RoshanakT.

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