The Associated Press January 12, 2012, 1:30PM ET

Iraq: Demand for dollars spikes amid Iran squeeze

Iraq's central bank has seen a sharp spike in demand for U.S. dollars it sells as unrest grips Syria and sanctions squeeze the cash reserves of neighboring Iran, a top official said Thursday.

Deputy central bank governor Mudhhir Mohammed Salih attributed the increased demand to opportunistic Iraqi businessmen buying up dollars to resell them to customers in need of hard currency across its borders.

"What's happening in the region is spilling over" into Iraq's economy, he said.

That apparent flood of greenbacks out of the country is putting a heavy burden on Iraq's efforts to keep its own currency stable, Salih added.

Iraq holds daily auctions of U.S. dollars generated mainly through oil sales to local banks in exchange for Iraqi dinars. It tries to keep the exchange rate stable at close to 1,200 dinars per dollar.

Iran's economy is increasingly being squeezed by U.S. and international sanctions. Hoarding dollars or other hard currencies such as the euro is a way for Iranians to protect themselves from a plunging local currency, the rial.

Iran's central bank governor acknowledged last week that the "psychological effects" of a new round of U.S. sanctions were partly to blame for the rial's slide. Iranian authorities also halved the amount of dollars Iranian passengers leaving the country can buy to $1,000, reflecting concerns about the flight of hard currency.

The sanctions are intended to pressure Tehran to abandon its nuclear program, which the West fears is aimed at developing a nuclear weapon. Iran denies it is trying to build an atomic bomb.

Salih said he believes some of the extra dollars from Iraq are also making their way to Syria, which has been wracked by violence as protesters demand the downfall of President Bashar Assad.

Iraq's central bank previously sold about $150 million worth of dollars during a typical auction, but demand in recent days has nearly doubled, Salih said.

The central bank sold $266.8 million worth of dollars Thursday, according to its website. It has close to $60 billion in its coffers now, Salih said.

Said Hirsh, a Mideast economist with Capital Economics in London, said Iraqi traders may well be selling dollars at a premium in Iran and Syria given the tight capital controls in both countries.

"While it is not surprising that this is going on, the currencies would have to be traded at a very heavy discount for it to make sense," he said.

He added, however, that Iraqis themselves might also be squirreling away more dollars amid uncertainty at home.

"Remember that an escalation in Iran or Syria will also affect them," Hirsh said.


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