Iranian currency drops amid jitters over regional trade

December 20, 2011

Iran’s currency plunged against the U.S. dollar Tuesday, continuing a sharp drop exacerbated by jitters over tightening international sanctions and uncertainties about the domestic economy and regional trade.

The plummeting value of the rial forced officials to backtrack on statements that Iran had cut trade relations with the United Arab Emirates, a major trading partner, for political reasons.

Iranian officials including the ambassador to the emirates, Mohammad Reza Fayyaz, initially confirmed Tuesday that Iran had cut trade ties with its third-largest trading partner, the semiofficial Mehr News Agency reported. The Iranian Econews agency also quoted Mehdi Ghazanfari, the minister of industries and business, as saying that trade with the United Arab Emirates was halted because of its “anti-Iranian positions.”

Following the statements, the rial fell to unprecedented lows against the dollar Tuesday, amounting to a 15 percent loss in value over the past three days, the Fars News Agency reported.

“There is sheer panic in the market,” one steel trader said. “The price of the dollar is increasing by the hour.”

Iran’s currency also dropped sharply in October 2010 after the United Arab Emirates implemented sanctions against Iran.

After Tuesday’s plunge, First Vice President Mohammad Reza Rahimi denied that Iranian-U.A.E. trade relations were cut. He said the emirates had simply been “warned” not to go along with sanctions proposed by the United States, Fars News Agency reported.

Adding to the confusion, the Iran-U.A.E. Chamber of Commerce said it had received a letter from the Central Bank of Iran banning all trade in dirhams, the U.A.E. currency, starting Tuesday.

Massoud Daneshmand, chairman of the joint chamber, pleaded for calm, Mehr reported. “The U.A.E. trades with Iran for at least $25 billion,” the agency quoted him as saying. “Any decision about this country should be thoroughly thought through.”

The episode highlighted the increasing sensitivity of Iran’s economy to fresh sanctions, as well as the unintended consequences of some erratic Iranian decisions, analysts said.

After Turkey and Iraq, the United Arab Emirates — particularly Dubai — ranks as Iran’s third-biggest regional trading partner, mainly facilitating the reexport of goods and forwarding international money transfers. The Islamic Republic is currently the second-largest reexport destination for Dubai, after India, according to U.A.E. figures.

Iran’s trade with Dubai actually grew in 2011 despite increasing sanctions, but several of Iran’s neighbors are now hinting that it will be curtailed.

During a two-day meeting of the Gulf Cooperation Council, a regional bloc of six Arab states bordering the Persian Gulf, Saudi Arabia drew applause when it accused Iran of endangering peace in the region. While no specific measures against Iran were announced, analysts said they expected new trade restrictions to affect Iran’s business relations with Dubai. The meeting ended Tuesday.

Even before the steep drop of the rial over the past three days, Iranians appeared increasingly to be losing faith in their currency. In recent weeks, customers have formed long lines to buy gold, forcing the government to halt all direct official sales last week.

“People fear that the government is running out of money, and they are taking their measures,” said Hadi Lari, an economist.

Mohammad Khoshchehreh, a former lawmaker critical of President Mahmoud Ahmadinejad, said he expects the government to take over the foreign currency market.

“They are forced to take full control of the market,” he said.

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