Iran’s currency weakened sharply in early January, with the US dollar reaching IRR 1.47mn in Tehran on January 6, marking a renewed bout of volatility in the foreign exchange market despite a brief period of calmer trading following the appointment of Abdolnasser Hemmati as governor of the Central Bank of Iran (CBI).

The move contrasted with the short-lived shift in market sentiment seen after Hemmati’s return to the central bank, when expectations of tighter management and clearer policy signalling had slowed the rial’s slide. In the weeks leading up to January 6, the dollar had traded in a wide but more measured range, rising from around IRR 1.2325mn to IRR 1.4475mn by January 5, reflecting persistent upward pressure punctuated by temporary pullbacks. The renewed jump to IRR 1.47mn underscored how fragile that stabilisation proved to be.

Market participants point to a key policy decision as the main catalyst for the latest move: the government and the CBI’s decision to end the allocation of subsidised foreign exchange for all imports except medicine and wheat. By withdrawing preferential access to cheap dollars, authorities have accelerated the process of price discovery in the FX market, pushing importers and traders towards the open market and intensifying demand for hard currency.

The pressure was visible across major currencies. On January 6, the euro rose to about IRR 1.7235mn, sterling climbed to nearly IRR 1.9911mn, the UAE dirham strengthened to around IRR 404,400, and the Turkish lira traded at roughly IRR 34,150. Traders said the broadly synchronised moves reflected domestic policy drivers rather than external shocks, with the rial weakening against most counterparts by around two percent on the day.

Hemmati, speaking on the sidelines of a cabinet meeting, sought to reassure markets that the authorities would pursue reform cautiously. He said the CBI would move gradually towards a unified exchange rate, warning that removing preferential FX without compensating households would risk fuelling inflation and social pressure. Any decision on subsidy removal, he stressed, would be taken after assessing reserves, market conditions and the specific role of essential goods, and would be accompanied by measures such as cash transfers or vouchers to offset the impact on consumers.

The new central bank chief argued that multiple exchange rates had encouraged rent-seeking and corruption while draining reserves, noting that previous rounds of subsidised FX allocation had repeatedly ended in price shocks and renewed pressure on the currency. He said the gap between official and market rates had amplified daily volatility and distorted pricing across the economy, pushing up the cost of basic goods even when subsidised dollars were in place. The stated goal, he said, was to create a more integrated and transparent FX market.

At the same time, Hemmati avoided commenting on a specific target level for the rial, insisting that the CBI should not be a price setter but rather a stabiliser. He said the bank was working on defining a managed trading corridor in which the exchange rate would move in line with economic fundamentals, with priority given to preserving and strengthening foreign exchange reserves rather than heavy-handed intervention. He also signalled plans to revive the role of licensed exchange bureaux as a “capillary network” for managing currency flows under sanctions.

Former central bank governor Valiollah Seif cautioned that while Hemmati’s appointment and clearer messaging could improve expectations and reduce speculative demand, this would not necessarily translate into a sustained strengthening of the rial. In the short term, he said, the exchange rate is driven less by inflation differentials than by political risk, uncertainty and speculative behaviour. More positive expectations can slow the pace of depreciation by dampening precautionary demand, but they do not in themselves reverse the underlying trend.

Seif outlined two possible paths for the months ahead. In a more favourable scenario, consistent policy signals and the avoidance of economic or political shocks could lead to a gradual, controlled adjustment of the exchange rate without sharp spikes. In a less favourable outcome, contradictory decisions, mounting fiscal pressure or external shocks could trigger another wave of rapid depreciation.