TCCIM Board Member: Inflation Determines Price of Dollar

Whenever there is talk of an increase in foreign exchange rates, the first thing that comes to mind is the country's inflationary situation. In general, when inflation rises and raises the prices of consumer goods and services, foreign currencies, like other goods, are also affected and register growth, Hamidreza Salehi, a Tehran Chamber of Commerce’s board member, told the Persian newspaper Jahan-e Sanat.
“Based on economic and scientific formulas, from the difference between the average domestic and foreign inflation, the upward slope of dollar price, or the downward slope of the national currency’s (rial) value can be calculated,” he added.
According to Salehi, when inflation rises and the prices of foreign currencies do not grow accordingly, either there is no demand for dollars, or the government has injected dollars. In other words, the policymaker may have injected fresh forex resources for maintaining the stability of the dollar price.
“Three factors can play a role in determining the price of the dollar; the first factor is inflation, which changes the price of currency like other consumer goods and services. The second factor is the demand for foreign currency, both from small consumers, economic players and traders. The third factor could be the possibility of the government injecting foreign currency,” he said.
“The lack of change in the price of foreign currencies during inflationary periods could be attributed to the interventionist policies of the government in the foreign exchange market,”
Referring to the impact of political news on foreign currency prices, he said, "There is no doubt that political developments can play a decisive role in reducing or increasing the dollar price. When new demand for buying dollar emerges amid the spread of political news, the possibility of dollar price growth increases.”
Salehi said it is also important to note that when psychological shocks caused by political news such as a political agreement with the West affect the market, expectations become evident in the decrease or increase in the price of dollar. 
“However, inflation could still be a warning sign for the dollar price to rise again. Although there may be an agreement and in the shadow of that, foreign exchange rates decline in a short period of time, because inflation exists in Iran's economy, it can cause the dollar price to grow again,” he said.
The private sector player said the dollar price determining factor in Iran's economy is inflation, but the economic engine also has an impact. 
“If the economic engine is on, demand for foreign currencies increases and this could lead to a rise in the dollar price, but if the economic engine is off and the economy is in a state of semi-suspension, demand for foreign currencies will decrease and this could lead to a fall in the dollar price,” he said.
“Until the engine of production is turned on and the policymaker is able to increase production with the aim of controlling inflation, we will see a growth in dollar price in the shadow of the accumulated inflation,” he concluded.