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Rising Dollar Adds Stress to Gov’t Policy
Economy, Business And Markets

Rising Dollar Adds Stress to Gov’t Policy

The strengthening of the US dollar against the Iranian rial as a result of a rate rise by the Fed will boost Iranian exports and make Iran’s assets frozen overseas more valuable once sanctions are lifted. But it will also push up the price of imported goods and make it harder for the Central Bank of Iran to dump its multiple exchange rate regime. The aggregate effect depends much on government policy regarding the central bank’s management of forex rates.
The greenback gained nearly nine percent in Tehran’s bureau de change-based market in 2015. It traded at 36,820 rials by Thursday’s close. Economists had expected the rial to gain against the dollar after the signing of the nuclear deal with the six world powers in July 2015. However, higher demand in anticipation of the lifting of sanctions plus worries about the Iranian economy moving back into recession negated the positivity after the deal, and the rial succumbed to the dollar’s rise.
The dollar ended 2015 with more than nine percent annual gain against a basket of currencies on the last day of the year, despite falling in December, with portfolio rebalancing from asset managers leading the currency higher in thin trading. Riding a rally dating back to May 2014, the greenback has appreciated by a quarter in value against a basket of currencies and by 22% against the euro, Reuters reported. For the year, the greenback rose over 10% against the euro for its second straight yearly gain.
The US currency was headed for its biggest monthly loss since June after the Federal Reserve raised its interest rate target from near zero on December 16 and underscored that it’ll proceed gradually with additional rate increases, according to Bloomberg.

  December Retreat
Despite this week’s decline, most analysts remained upbeat on the dollar’s longer-term advance as the Federal Reserve is expected to continue to raise rates, possibly four times in 2016, Reuters reported. The analysts’ forecast gain for the dollar was far smaller than a year ago, and there was less consensus on which currencies it could gain against.
“The Fed is on track to raise rates in 2016, which will be critical for the dollar,” said Shaun Osborne, chief currency strategist at Scotia Capital in Toronto.
The US central bank raised rates for the first time in nearly a decade, lifting the target range of its policy rate by a quarter point to 0.25-0.50%.
Since the hike, the dollar has weakened against major currencies as traders reduced their long positions on the greenback, analysts told Reuters.
The message from the Fed, combined with European Central Bank stimulus measures that were less robust than some investors had anticipated, have led dollar bulls to retreat. Large speculators such as hedge funds trimmed futures bets on greenback gains over the past three weeks, Commodity Futures Trading Commission data show, Bloomberg reported.
“The expectation is that we’re not going to see aggressive tightening and that’s really impacting the dollar—that’s what we’re going to see going into yearend,” said Sireen Harajli, a currency strategist at Mizuho Bank Ltd. in New York.
The dollar index, which measures the greenback against a basket of six major rivals, hit a more than one-week high of 98.750. For the month, it fell 1.5%, its first decline in four months.
The index had surged about 9% in 2015 through November as investors anticipated that the Fed would tighten policy while counterparts in Europe and Japan carry out unprecedented stimulus.

  Solid Greenback
“The dollar may end the year with a little pause but it’s too early to declare the uptrend has reversed,” said Koji Fukaya, the Tokyo-based chief executive officer at FPG Securities Co. “The dollar will remain solid through 2016 as interest rates rise with an improving economy.”
The dollar will strengthen against all its Group-of-10 peers except the pound and Canadian currency in the first quarter, while New Zealand’s kiwi will be the worst performer, according to analyst forecasts.
The greenback has advanced against eight of its G-10 counterparts since the end of September as the Federal Reserve raised interest rates and futures signal 55% odds another increase will take place by April. The kiwi and Australian dollar have shrugged off weakness in commodities to lead gains. The pound dropped to the lowest level since April this week versus the dollar amid concern a slowing UK economy makes it less likely the Bank of England will follow the Fed in tightening policy next year.
Intercontinental Exchange Inc.’s US Dollar Index, which tracks the currency against six major peers, has risen about 1.8% this quarter. It will climb 2.5% by March 31, the Bloomberg forecasts predict. There’s a 48% probability the Fed will raise its benchmark by its March meeting and a 55% chance by April, according to data compiled by Bloomberg based on futures.

  Anywhere But Up
With the dollar climbing in global markets and the rial troubled by a weak economy, falling oil revenues and declining but still very high inflation, it is hard to see the greenback going anywhere but up against the Iranian unit of value. The lifting of sanctions will change dollar-rial dynamics, but the effects of sanctions relief on the real economy will not materialize until late 2016 and early 2017.
As the route to exports and foreign investment opens, demand for the dollar and the rial will both rise, though the aggregate effect may very well be more demand for the greenback. Coupled with dollar’s strength as the Fed raises rates throughout 2016, the central bank in Tehran will see its newfound reserves depleted rapidly if it chooses to bolster the rial. The CBI has promised to unify the foreign exchange rate regime within six months from the lifting of sanctions. To do so it would have to forgo exchanging greenbacks at an over 22% discount to the open market.
The government may fight this trend, by favoring importers over exporters, for fear of more expensive imports hurting household welfare. It has written down a 29,970 rial figure for every dollar in its draft budget for 2016-17 -- way lower than its projected market rate. The government may mandate the central bank to unify rates at a rate lower than the market exchange rate. That will quickly exhaust the bank’s foreign exchange reserves. The expansive monetary policy the bank has recently adopted will itself push the rial the other direction, towards weakening it.
Will the government waste its resources battling the economics behind dollar’s rise, or will it allow Iranian exports to become competitive? History favors the former prediction, prudent policy the latter.

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