Bloomberg News

Iran Central Bank Moves to Rescue Rial as Allies Tighten Net

January 06, 2012

(Updates with bankers’ meetings in third paragraph, oil prices in second-last.)

Jan. 5 (Bloomberg) -- Iran’s central bank moved to avert a slide in the value of the rial as the U.S. and allies prepared for further sanctions that may include an oil embargo.

The rial rose to 14,000 per dollar at currency-exchange traders yesterday, from 17,800 on Jan. 2, after foreign currency was made available to the market, the state-run Fars News Agency said, citing Mohammad Kashti-Aray, director of the Gold and Jewelry Union of Iran. Fars didn’t give further details of the central bank’s action. The official rate for today was 11,180 rials a dollar, according to the central bank’s website.

Today, foreign-currency traders in Tehran were ignoring instructions issued yesterday by the central bank for them to sell the dollar at the rate of 14,000 rials, Fars said. They refused to trade at that rate or were only using the rate of 16,000 rials, Fars said. Directors of Iran’s banks were asked to meet central bank Governor Mahmoud Bahmani today to address the rial’s volatility. The bank will host a meeting of economists on Jan. 9 to discuss management of the exchange rate, Fars said.

The currency has plunged because “Iranians are seeking safer havens in internationally traded currencies and gold as the country faces the prospect of dealing with tougher international sanctions,” said Jarmo Kotilaine, chief economist at National Commercial Bank in Saudi Arabia.

Tighter Sanctions

The U.S. and allies are tightening restrictions on Iran, accusing it of a covert plan to build nuclear weapons, a charge Iran’s government denies. President Barack Obama on Dec. 31 signed into law measures that deny access to the U.S. financial system to any foreign bank that conducts business with the Central Bank of Iran. The European Union says it will decide this month on new sanctions, possibly including an oil embargo.

Iran’s inflation rate has surged as the government removed subsidies on staple goods. It may reach 22 percent by the end of the current calendar year in March, Deputy Economy Minister Mohammad-Reza Farzin said last month.

“Inflation is a big problem as it is, and a devaluation would obviously fuel imported inflation even further,” Kotilaine said.

Iran has blocked access to mesghal.com, a popular website used by Iranians to track the price of gold and international exchange rates, according to the Asriran news website.

The government is targeting growth of 6 percent for the year ending in March, Economy and Finance Minister Shamseddin Hosseini said in an interview in June. The International Monetary Fund estimated in September that Iran’s economy would grow 2.5 percent in 2011 and 3.4 percent this year.

Threat to Shipping

Iran has warned it may halt traffic through the Strait of Hormuz, the passageway for about a third of the world’s seaborne-traded crude, in response to curbs on its oil sales.

That’s probably “a bluff,” Paul Sullivan, a political scientist specializing in Middle East security at Georgetown University in Washington, said in an e-mailed response to questions. “They would strangle their economy and Iraq’s, their ally. It could also be seen as an act of war.”

The U.K. would be willing to join a military action aimed at keeping the strait open, Defense Secretary Philip Hammond will say in a speech in Washington today, according to extracts released by his office.

Iran’s army chief has also warned the U.S. against sending the John C. Stennis, an aircraft carrier, back to the Persian Gulf after it left the area a week ago. The U.S. rebuffed Iran’s demand, saying it will continue to protect freedom of navigation in the region.

Higher Oil Price

The dispute and the prospect of supply curbs due to sanctions on Iran helped push oil near the highest in almost eight weeks in London today.

Brent oil for February settlement was up 5 cents at $113.75 on the London-based ICE Futures Europe exchange as of 12:01 p.m., after rising to $114.64 a barrel, the highest intraday level since Nov. 14. On the New York Mercantile Exchange, crude for February delivery was at $102.57, 65 cents lower, in electronic trading. Yesterday the contract climbed to $103.22, the highest close since May 10.

Iran, the second-largest producer in the Organization of Petroleum Exporting Countries, produced 3.58 million barrels a day in December.

--With assistance from Caroline Alexander in London. Editors: Digby Lidstone, Ben Holland, Heather Langan, Andrew J. Barden.

To contact the reporter on this story: Glen Carey in Jeddah, Saudi Arabia, at gcarey8@bloomberg.net.

To contact the editor responsible for this story: Andrew Barden at barden@bloomberg.net.


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