How Is the Iraqi Dinar Trading Doing?
|October 18, 2014||Filled under Iraqi Dinar|
Iraqi Dinar –
Over the last year, the Iraqi dinar (IQD) has traded within a very narrow range averaging roughly 1,220 to the U.S. dollar, with an approximate upper bound of 1,230 and a lower bound of 1,210. The currency had approached 1,300 to the US$ in May 2013, but subsequently recovered.
Those figures are the market rate for the Iraqi dinar, which differs slightly from the official rate set by the Central Bank of Iraq (CBI). This official rate is determined by an auction process that is handled by the CBI and involves about 10 to 15 banks. The dollar amounts involved in the auction process are quite substantial. For instance, the July 24, 2014 auction resulted in a volume of US $296.57 million at a rate of 1,166 dinars per US $, of which the equivalent of about $75 million was settled in cash and $221.5 million was used for transactions.
The official rate or auction price has been stable at 1,166 to the US$ since January 17, 2012, and was at 1,170 for the preceding three years. Since the auction price is set by the Central Bank of Iraq, it is not as accurate as the market price in gauging sentiment for the Iraqi dinar.
The spread between the auction price and market rate indicates whether the currency is relatively stable or is headed for a period of volatility. This spread has been quite stable over the past year. While Iraqi dinars were priced at a discount of about 4.6% to the official rate earlier until May 29, 2014, that discount had narrowed to 3.8% by July 24, as the market rate improved by 0.8%, from 1,222 per US$ to 1,212.
This improvement in the market rate, while marginal, flies in the face of Iraq’s deteriorating fundamentals, with the nation facing the specter of civil war since June, as Sunni militants captured a number of important cities in northern Iraq and established the Islamic State of Iraq and Syria.
The Iraqi dinar’s stability may be attributed to the iron grip exerted on the currency by the Central Bank of Iraq.
The Bottom Line
Watch the market rate of the Iraqi dinar, as it will be a better gauge of market sentiment for the currency than the auction price or official rate, which is set by the Central Bank of Iraq.
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