The Iranian rial (IRR) has been successively recording drops in recent days following the escalation of tensions in the region between Shi'ite Muslim militias close to Iran and the US and Israel. This has raised concerns among market observers over another likely drop in the Iranian currency. 

The US dollar reached IRR588,000 by the close of trade, up more than 4% over the week in Tehran’s Ferdowsi Street, home to several major foreign currency exchanges. Unsurprisingly, the market has been experiencing a flood of new demand, mostly from people trying to save the value of their assets after several months of relative calm through several recently introduced banking mechanisms, including the official exchange rate centre created by the Central Bank of Iran (CBI).

This upward trajectory began on late January 28, following US President Joe Biden's response to a drone attack on US troops in northeast Jordan, which resulted in the deaths of three Americans. Biden attributed the attack to Iran-backed militias and pledged an appropriate response, saying on January 30 of a "very consequential" response to the attack.  

Local media reports confirm a significant outflow of funds from the capital market in the past week, with people looking for a safe haven for their funds. Such behaviour has always been typical during increased tensions with the US. But with the recent uptick in regional troubles on the back of the October 7 attacks in Israel by Hamas which killed more than 1,000 Israelis, traders and those in Tehran and elsewhere are increasingly concerned about any spillover at home.

The sudden devaluation of the rial has piled pressure on the CBI, with current Governor Mohammad Reza Farzin under mounting pressure to not collapse under the weight of short sellers in the market and potential regional neighbours buying up stocks of US dollars from border markets in the Emirate of Dubai, Iraq and even Afghanistan's border cities. 

The CBI's curious response to this latest panic buying session was to relieve deflect pressure on people purchasing greenbacks and to allow banks to sell certificates of deposits (CODs) to the general public instead. These CODs are offered at 30% interest, nearly 7% higher than the interest rates of long-term deposit accounts in the banking sector, but still short of inflation at 40%. The CBI also noted that the money will be used for loans to businesses, mainly to help them meet their need for working capital. 

Meanwhile, the ongoing panic on the street level has bled into the Tehran Stock Exchange, whose main index, the TEDPIX, lost 2.24% of its value over the past ten days as the clerical government deals with the external shocks to its position in the region from regional rivals and enemies.

One local critic, Abdolnasser Hemmati, the former governor of the CBI, has said the CBI’s forex policies over the last year have been poorly planned. In a tweet on his account on X, formerly Twitter, he said, “The market will be out of control when the CBI suppresses the prices for long periods and tries to ignore a key segment of the market.” He also added his pessimism about the impact of plans for offering CODs with high returns, considering the troubled state of the banks and capital market.

Several analysts have said in recent days that the market is no longer predictable, considering the volume of attacks from multiple actors across the region keeps all sides preoccupied. Meanwhile, several forex traders in Tehran are acting cautiously as they believe that the CBI will likely boost the supply suddenly when the CODs fail to gain traction with the local denizens. 

That shift to pushing dollars in the market could already happen, with a modest appreciation in after-hours trading in regional markets for the rial. Recent prices by the start of trade in Tehran reached IRR584,500, indicating a fightback from the CBI had begun earlier than previous drops in the local currency.