After a period of relative stability spanning three months, the Iranian rial (IRR) recently witnessed a sudden and significant depreciation against the US dollar (USD).
This alarming shift comes amidst escalating tensions in the Middle East, ignited by the latest clash between Israel and Hamas. As Hamas launched an attack on Israel over the weekend, the IRR swiftly tumbled in the open market.
Just before the attack, on October 7, the rial was trading at around 495,900 per USD in the unofficial market. But the fall accelerated sharply in the days after the attack, surging to nearly 535,000 per dollar on Monday, October 9.
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Why is IRR under pressure?
The Iranian rial has been under severe pressure over the past year amid Iran’s worsening relationship with the West. The IRR fell to an all-time low of approximately 580,000 per USD in the open market in February 2023 after the European Union (EU) imposed fresh sanctions on the country.
After the free fall, the IRR somewhat stabilized, but even that was short-lived, with the currency now being under significant pressure as tensions between Israel and Hamas intensified.
However, it is not the sole battle between the two that is weighing on Iran’s currency. Over the past few days, speculations arose that the Islamic Republic may be supporting Hamas, particularly its latest attack on Israel.
Following the assault, Israel vowed to retaliate against Hamas, raising broader concerns over a potential proxy war that could involve both Iran and the US. This uncertainty has evidently spurred the demand for the US dollar and other major currencies in Tehran while weighing on the rial.
Iran’s attempts to keep IRR below 500,000 unsuccessful
The latest wave of IRR devaluation came after three months of Iran’s attempts to maintain the value of 1 USD below 500,000 rials by pumping hundreds of millions of dollars into the economy.
Before Hamas’s attack, foreign exchange (Forex) traders had expected a surge in the rial’s value against the US following the release of Iran’s $6 billion frozen assets in South Korea and $1.6 billion in Luxembourg.
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