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Forex Rates Function of the Market

Forex Rates Function of the Market Forex Rates Function of the Market

Prevailing foreign exchange rates are not predisposed to political developments but are rather a function of demand and supply, a former governor of the Central Bank of Iran said, Eghtesad News website reported Monday.

The foreign exchange market has gone through more than its share of ups and downs in the recent past due largely to the protracted nuclear dispute and negotiations between Iran and the West to address the problem, Tahmasb Mazaheri said.

“Forex rates declined as the prospect of a final nuclear deal emerged in early summer only to go back to the old ascending order as soon as the deal was clinched in mid-July.”

On the recent upsurge in forex rates in the market (USD selling for 34,200 rials Monday morning), Mazaheri denied reports that the government was trying to compensate for the steep decline in oil revenues by increasing currency rates. “The government does not have the authority to manipulate exchange rates” to plug the deep holes in its balance sheet.

Crude prices have more than halved since the summer of 2014 leading to huge budget deficits in oil producing countries, including Iran. The former CBI chief believed forex rates “reflect economic realities, namely liquidity, demand and supply.”

On the recent plans announced by the government to regulate the foreign exchange market by launching a currency bourse, Mazaheri agreed with the views of President Hassan Rouhani’s political opponents who insist that hard currency “is not a commodity.” However he warned that “The literal meanings of words should not distract the focus away from the main topic.”

Opponents of the plan argue that a bourse is a place “where commodities such as iron are traded” and trading futures and speculative activities could trigger fluctuations in the already volatile forex market.

On the plus side of the controversial plan, he noted that a currency bourse could augment confidence in and among businesses and economic decisions makers giving them a more clear view of what lies ahead.

“Futures and forwards are popular in the world. They offer individuals the option to pick and choose. Many businesses use these instruments to protect themselves from forex rate volatility”, Mazaheri was quoted as saying.

He noted that the plan is in line with the CBI mandate to enable businesses to forecast where the economy is headed while at the same time reduce currency fluctuations.

Last month the Securities & Exchange Organization announced that the much-anticipated ‘currency bourse’ will be launched soon by introducing foreign exchange futures.

Financialtribune.com