The rial plunged on Saturday, as a plummeting oil price stirred fears of an increasing government deficit, adding to the sentiment that reined in the market after nuclear talks between Iran and six world powers (the P5+1) were extended this week by another 7 months.
The rial continued its downfall after OPEC decided to keep current crude oil production output despite a huge global oversupply. This adds to concerns over the widening budget deficit in Iran which could lead the government to monetize its deficit.
It now looks as if investors are buying any currency they can get their hands on. Only the Norwegian Krone, also a commodity currency, fell against the rial.
The West Texas Intermediate fell 10 percent on Friday on OPEC's decision, settling at $66.15 a barrel while the Brent proved more resilient declining by 3.35 percent to $70.15 a barrel. The Iranian government needs oil at higher prices to finance all its projects.
The dollar soared to its highest in 17 months versus the rial on Saturday (the first working day of the week), due to its strengthening against all major currencies. The greenback surged by as much as 2.32 percent to 33,900 rials by 12:15 GMT Saturday.
This is the fourth straight month that the greenback is advancing against the rial. The US currency has advanced by 18 percent versus the rial in the past year.
The DXY, which measures the greenback against a basket of major currencies, gained 0.85 percent to 88.36, just below four-year highs of 88.44 set on Monday, according to Bloomberg generic prices (BGN).
The euro also gained versus the rial despite fears of deflation pushing the currency down in the FOREX market. The European currency surged by 1.73 percent to 42,370 rials on Saturday. The euro has gone up by 4.6 percent in the past seven days according to data compiled by the Financial Tribune.
Annual consumer inflation in the euro zone cooled to a five-year low as energy prices fell, suggesting deflation remains a real threat for the European Central Bank, Reuters reported.
Sterling also rose by 1.44 percent versus the rial and traded at 52,800 rials, by 12:15 GMT on Saturday, despite falling on Friday, as the British pound was pushed down against the dollar and fell two thirds of a percent to $1.5645.
Amid a rise in bets on more volatility into next week's European Central Bank meeting, the pound was also down 0.43 percent at 79.60 pence per euro.
Lower fuel costs should mean that inflation, already declining across Europe, will fall further, encouraging bets that the Bank of England will hold off on raising interest rates for longer - possibly even into 2016, some analysts now say.
The currencies of two of Iran's neighboring countries gained the most. The Turkish lira advanced more than three percent to 15,600 rials. The lira has gone up just shy of six percent versus the rial. The Iraqi dinar soared by staggering 5.26 percent reaching 30,000 rials.
The Azadi bullion coin jumped to a two month high, extending its two week rally, despite gold slipping in the international market on the rising dollar.
Azadi rose by over 0.43 percent and hit 9,415,000 rials by 12:15 GMT on Saturday, as safe haven demand and rising dollar outweighed bullion's three day drop on the international market.
Traders are also cautiously eyeing Sunday's Swiss vote on whether the Swiss National Bank should increase its gold reserves from last month's eight percent to 20 percent. A 'yes' vote, however, could prompt the Swiss central bank to buy about 1,500 metric tons of gold over the next few years, boosting bullion prices, analysts say. Though most recent polls show support for the move has declined to 38 percent.
On November 24, 2013, Iran and the P5+1 reached a six-month deal, which was extended in summer by four months to provide more time for negotiators to reach a "permanent" agreement over Tehran's nuclear energy program.
The widening gap between the dollar's official rate and market rate amid a decrease in government oil revenues also curbed hopes of a unified foreign exchange rate regime, as the Central Bank of Iran is already low on reserves. The declining rial could also increase inflationary pressures in Iran by raising the price of imported goods.
Top administration officials have expressed hope that they would compensate the decline in oil prices by the end of this fiscal year, ending March 20, 2015.
