The Iranian rial fell to a fresh record low against the US dollar on August 31, giving up an early recovery after renewed fighting between Iran and the United States added to pressure from tighter sanctions and concerns over the country's access to foreign currency.

The dollar was quoted at IRR2.112mn on Tehran's open market late in the session, after briefly reaching IRR2.104mn. It opened at IRR2.082mn and initially fell to IRR2.07mn before reversing course and climbing above IRR2.11mn during afternoon trading.

The latest move extends a sharp decline in the Iranian currency. The dollar traded at IRR1.995mn on August 26 and IRR2.053mn on August 29, putting its gain against the rial at more than 5% in five days.

Other major currencies also remained elevated. The euro was quoted at around IRR2.436mn, sterling at IRR2.844mn and the UAE dirham at IRR577,300.

The dirham is particularly important for Iran's foreign-exchange market because Dubai has traditionally been a major hub for Iranian imports, re-exports and international payments. Recent restrictions on UAE commercial and financial dealings with Iran have disrupted one of the country's main channels for trade and foreign-currency transactions.

The latest bout of rial weakness followed the first direct US-Iran military confrontation in more than a month.

 

 

US forces struck two Iranian rocket launchers on Larak Island in the Strait of Hormuz on August 30, saying Islamic Revolutionary Guard Corps forces were preparing to launch rockets carrying sea mines into the waterway. Iran retaliated with ballistic missiles targeting two US bases in Jordan. Jordan said it intercepted eight missiles that entered its airspace.

The exchange marked the first known US military strikes inside Iran since late July and renewed fears of a broader escalation around the Strait of Hormuz, a crucial route for global energy shipments.

For Iran's currency market, renewed military confrontation adds to demand for hard currency. Iranian households and businesses have historically turned to dollars during periods of political and military uncertainty to protect savings and working capital against further depreciation.

The fighting has coincided with Washington's push to intensify economic pressure on Tehran. US Treasury Secretary Scott Bessent has said further secondary sanctions will be announced regularly, targeting institutions involved in transactions with Iran.

The latest US campaign extends restrictions across Iran's financial, oil, shipping and trading networks and threatens foreign companies and financial institutions with penalties for continuing certain dealings with Tehran.

Iranian officials have sought to play down how much additional damage the measures can inflict. Deputy Foreign Minister Ghanbari said the latest sanctions did not target previously untouched parts of the Iranian economy and argued that Washington was exaggerating their likely impact.

For the currency market, however, the extent of enforcement may be more important than whether the sanctions formally cover new sectors. Restrictions on foreign banks, intermediaries and trading partners can make it harder for Iran to transfer and access export earnings, reducing the effective supply of hard currency available to businesses at home.

The Central Bank of Iran (CBI) has stepped up its own efforts to counter the pressure.

CBI Governor Abdolnasser Hemmati said the bank began accumulating foreign currency in February in anticipation of tougher conditions. He said foreign exchange needed for essential goods and medicines had been secured through the end of the Iranian year in March 2027 and around $20bn had been earmarked to meet industry's foreign-currency requirements.

The central bank has also attempted to increase the availability of physical foreign currency. It made up to $500mn in foreign banknotes available through the banking network from August 25, allowing banks and affiliated exchange offices to sell currency to eligible individuals and businesses.

Only $20mn was purchased through the banking network during the programme's first three days, according to CBI figures. The central bank said demand had been lower than expected and that it remained ready to meet orders up to the full $500mn allocation.

The low take-up through banks does not necessarily indicate weak demand for dollars across Iran. Access to bank-supplied currency is subject to eligibility rules and transaction limits, while the open market also reflects demand from households and businesses seeking dollars as savings or protection against further depreciation.

The CBI's broader figures also point to tighter foreign-currency supply than a year ago. Hemmati said an average of $175mn a day had been supplied since the beginning of the current Iranian year, compared with $205mn during the same period last year, a decline of around 15%.

Hemmati has described the widening gap between exchange rates as temporary and said currency policy should not be changed in response to short-term fluctuations. He has also said the recent acceleration in inflation has stopped, putting monthly inflation in August at around 4%, while liquidity growth has slowed.

The August 31 market move nevertheless showed how difficult it is for the CBI to stabilise expectations while geopolitical and financial risks are rising simultaneously. The dollar's early decline to IRR2.07mn was completely reversed during the session, with the rate subsequently moving beyond IRR2.10mn to a new high.

With renewed fighting adding to tougher US financial pressure and the amount of foreign currency supplied to the economy already below last year's level, the rial remains vulnerable to further bouts of demand for dollars.