Economy, Business And Markets
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Regulating Forex Market

Regulating Forex MarketRegulating Forex Market

In the absence of an integrated system to regulate the forex market, the Iranian policy makers have always faced a challenge to have access to precise and updated information on exchange rates. The problem has provided unauthorized dealers a room to manipulate the rates, as they do not need to be concerned about immediate reaction of government officials.

So, a set of measures must be taken by the authorities, who want to limit the negative impact of small dealers on the forex market, to develop an integrated information system within which real supply and demand can drive the exchange rates.

A review of the exchange rate mechanisms in place in other countries reveals that transparency is a crucial factor in policymaking. Transparent data on monetary and economic indicators such as the interest rate and unemployment could prevent abrupt fluctuations in the forex market, according to an article published this week by Tejarat-e Farda, a Persian-language weekly magazine.  

In Iran, however, the forex rate is more price-oriented in light of the small size of the economy. However, in many countries, the rate is a tool to assess developments of the trade and manufacturing sectors as well as to measure employment changes. In some nations, the authorities even prefer to keep their national currencies weak against foreign currencies, a measure that could encourage exports.

Recent studies show that the main economic indicators would influence the forex rates rather than vice versa. In Iran, however, the forex market is shallow and easily manipulated by dealers, as the economy solely relies on oil exports which is traded in dollars. Additionally, the financial market is under-developed in Iran and foreign currency reserves are limited.

 Current Issues

With the multiple-exchange rate regime , the official rate is daily announced by the Central Bank of Iran. But the market rate is decided about by the factors which do not necessarily have a real base.

The ‘AED transfer rate’ and the ‘US dollar exchange rate for immediate and future sales’ are the two variables which mainly define the market exchange rate in a trade center on Manoochehri Street, in central Tehran.

The two rates together with the rates announced by market dealers for future sales of the US dollar are the decisive factors in setting the market rates.

Field studies show that the exchange rates for foreign currencies, in most cases, are not real, as no actual trade takes place.

The US dollar exchange rate for future sales, also known as US dollar exchange rate with next-day delivery, intensifies the market’s fluctuations, as it does not follow a regular pattern and sometimes cannot even be linked to any market trend or economic or political development. Therefore, the real reasons behind the rise or fall of the rates remain unclear. Other factors such as information monopoly and trade after working hours add to the existing ambiguity of the market.

 Solutions

Until the time is right to switch the current system to a single-rate regime, policy makers can regulate the forex rate by recognizing the free market. To that end, policy makers should set up a center, where real supply and demand can meet and official exchange offices have the upper hand in defining the rates.

As the next step, policy makers should recognize the rates decided within the center and should let the banks’ exchange offices deal with the same rates.

It is evident that when the forex rate is decided based on supply and demand dealers are unlikely to be able to manipulate them.

 

Financialtribune.com