journalfront

Currencies

The Surging US Dollar and Iran's Economic Struggle

2024-11-23

The US dollar's continuous ascent past significant marks in Iran's currency, the rial, has become a prominent economic story. This upward trajectory is not just a numerical occurrence but a reflection of deepening geopolitical tensions and domestic policy challenges. Iran's economic situation is at a critical juncture, with various factors at play.

Unraveling the Impact of US Dollar Surge on Iran's Economy

Geopolitical Tensions and Economic Impact

The US dollar's surge past the 700,000 rials mark on Saturday once again showcases the profound influence of geopolitical factors. Escalating tensions between Iran and Israel have played a significant role in driving this upward momentum. Military confrontations, such as missile and drone attacks launched by the Islamic Revolutionary Guard Corps on Israeli targets, have created an atmosphere of uncertainty and instability. This has led to a loss of confidence in the Iranian economy, with the rial's value plummeting. Since the 2015 nuclear agreement with world powers, the rial's value has depreciated over 20-fold, and compared to its value at the time of the 1979 revolution, it has now reached just 1/10,000 of its original worth. The recent International Atomic Energy Agency (IAEA) Board of Governors' resolution criticizing Iran's lack of cooperation on nuclear matters has further exacerbated the situation. Calls for producing nuclear weapons by some Iranian officials, combined with fears of more and stricter international sanctions, have created a perfect storm for Iran's economy.

Domestic Policy Challenges and Their Consequences

Iran's economy is not only facing external pressures but also internal policy challenges. Shortages of natural gas and electricity have reduced industrial production, exports, and earnings in foreign currency. These domestic issues are compounding the economic woes caused by geopolitical tensions. The potential activation of the snapback mechanism after the IAEA resolution could reintroduce sanctions lifted under the 2015 nuclear deal, likely deepening Iran's economic difficulties. This situation is reminiscent of the international pressure faced during Mahmoud Ahmadinejad's presidency when the country faced severe economic and diplomatic isolation. The Iranian government is now grappling with the need to balance its nuclear ambitions with the need to address economic concerns.

Historical Perspective and Current Trends

Looking back, last year in November, the dollar was trading at approximately 500,000 rials. However, in recent months, the sharp rise has been fueled by a combination of factors. The Iranian calendar year began in March, and since then, the economic situation has been in a state of flux. October marked the beginning of another downward trend, with the dollar climbing to 690,000 rials on October 26 following an Israeli airstrike on military targets in Iran. This upward momentum was reinforced by geopolitical developments, such as Donald Trump's victory in the US presidential election and the news of the IAEA resolution. On November 23, the dollar reached the 700,000 rials threshold again, signaling potential inflationary pressures in the months ahead. It is clear that Iran's economy is in a state of transition, and the future remains uncertain.

President-elect Donald Trump's pledge to impose tariffs has sent shockwaves through the financial markets. The Canadian dollar, in particular, has experienced significant fluctuations. In this article, we will explore the impact of these tariff announcements on various currencies and the market outlook.

Unraveling the Effects of Trump's Tariff Policy on Currencies

CAD Tumbles: The Aftermath of Trump's Tariff Talk

President-elect Donald Trump's decision to levy tariffs of 25% on US imports from Canada and Mexico, along with an extra 10% on China, has had a profound impact on the Canadian dollar. In just two hours, the Canadian dollar weakened by as much as 1.5%, highlighting the market volatility we can expect during a second Trump presidency. The USD/CAD has surged to its highest level in more than four years, and we anticipate further upward movement to C$1.45. The weaker Loonie has also benefited the GBP and EUR, which are up around 0.7% this morning, finding firm support at their 200-day moving averages. However, there are still many unknowns regarding how countries will retaliate, and the lingering risk of fresh headlines will likely keep volatility elevated.Another aspect to consider is the short-term reprieve for the euro. Germany's Ifo index, a prominent leading indicator for Europe's biggest economy, took another nosedive. Despite the EUR/USD staging a decent bounce from the brief plunge to $1.0335 on Friday, lingering beneath $1.05, the path of least resistance remains to the downside. Concerns over Europe's stagflation risks and weak industrial order books suggest that the euro is primed for more losses, and parity appears increasingly likely over the next year. The options-implied probability of parity trading within the next six months is now around 30%, up from 20% at the start of this month.

Pound Struggles to Gain Traction

GBP/USD is facing challenges in regaining control of the $1.26 handle and its 100-week moving average. Despite the US dollar's softer start to the week, the UK-US yield spread remains largely unchanged, with yields falling in both regions. The risk-sensitive pound failed to capitalize on the improving global sentiment evidenced by the rally in global stocks on Monday. The pound also lost its grip on €1.195 versus the euro, sliding around 0.5% on Monday, which was its worst day of the month. Money markets are still pricing in less than a 20% chance of a Bank of England (BoE) rate cut in December and three cuts by the end of 2025. However, stagflation fears are on the rise, limiting sterling's gains from this hawkish outlook. Against the dollar, the downtrend remains intact as long as GBP/USD stays below $1.28 and its 200-day and 200-week moving averages.

CAD Under Pressure: The Tariff Chatter's Impact

The key global risk events of November 25-29 have added to the uncertainty surrounding the CAD. The FX rates published by Convera's Market Insights team are for research purposes only and may not align with live exchange rates. The tariff chatter has put significant pressure on the CAD, and its performance in the coming days will be closely watched. As countries navigate through this complex trade landscape, the CAD's future remains uncertain. However, one thing is clear - the tariff announcements have set off a chain reaction that is affecting currencies around the world.In conclusion, the Trump tariff talk has had a far-reaching impact on the global currency markets. The CAD, in particular, has been under the cosh, while the euro and pound have also faced challenges. As we move forward, it will be crucial to monitor how countries respond to these tariffs and how the markets adjust. The uncertainty surrounding trade policies will continue to drive volatility, and investors will need to stay vigilant to navigate these choppy waters.

Russia's Central Bank has taken a significant step by deciding to refrain from purchasing foreign currency on the domestic market from November 28 through the end of 2024. This move is aimed at reducing financial market volatility and is in line with the regular operations of the Russian Finance Ministry under fiscal tightening measures. According to the bank's press release, this decision is of great importance for the stability of the financial system.

"Central Bank's Currency Move: Impact on Russia's Financial Landscape"

Reasons for the Decision

The Central Bank's decision to hold off on purchasing foreign currency is a strategic move. By doing so, they aim to create a more stable environment in the financial markets. This helps to prevent sudden fluctuations and ensures a more predictable economic situation. It also shows the bank's commitment to maintaining the health of the financial system.

Moreover, this decision is in line with the overall fiscal tightening measures being implemented. It allows the bank to focus on other aspects of the economy and manage resources more effectively. By not engaging in large-scale currency purchases, the bank can allocate funds more efficiently and support other sectors of the economy.

Continuous Sale of Foreign Currency

While the Central Bank will not be purchasing foreign currency, it will continue to sell foreign currency as part of replenishing and utilizing funds from the National Wealth Fund. This helps to maintain a balance in the foreign exchange market and ensures that the country has access to the necessary foreign currency reserves.

The sale of foreign currency also provides an opportunity for the bank to manage the value of the ruble. By adjusting the supply and demand of foreign currency, the bank can influence the exchange rate and prevent excessive volatility. This is crucial for businesses and individuals who rely on stable exchange rates for their economic activities.

Regulator's Decision on Resuming Operations

The decision to resume operations on the domestic currency market will be made by the regulator based on the prevailing situation in financial markets. This shows the flexibility and responsiveness of the Central Bank. They will closely monitor the market conditions and make decisions that are in the best interest of the economy.

Deferred purchases will be carried out in 2025, which gives the bank time to assess the market and make informed decisions. This approach allows for a more measured and strategic approach to currency management, taking into account the various factors that can influence the financial markets.