Iran’s battered currency, the rial, has recovered more than half of its losses during May as the likelihood of war with Israel decreased and the US continued negotiations with Tehran.

The sudden death of President Ebrahim Raisi last week in a helicopter crash briefly weakened the national currency, but it recovered surprisingly fast, although it is far from pre-January levels.

The rial, which was trading at around 510,000 per dollar in December 2023, began to fall steadily from early January as tensions rose in the Middle East and Tehran continued to threaten Israel. By mid-March it was trading at around 600,000 to the dollar but fell to 670,000 as Israel attacked Iran’s diplomatic compound in Damascus on April 1.

Two top Revolutionary Guard generals and five other key officers were killed when Israeli missiles flattened a building near the embassy, prompting Iran to vow revenge, and Israel threatening to retaliate.

This raised the likelihood of both an economic and a political crisis for Tehran’s rulers, as the specter of more inflation on top of the current 50-percent annual rate sparked a sense of panic.

Tehran finally delivered on its promise by launching more than 300 drones and missiles against Israel on April 13-14, 99% of which were shot down by Israeli air defenses and allied warplanes.

However, the Israeli response a few days later was very limited and measured, gradually dissipating the fears of a major confrontation.

By late April, the rial began to rise and by mid-May the dollar fell to around 580,000 rials in Tehran’s black market, meaning a strong come back for the rial from the April lows. It has stayed at that level for almost two weeks.

Although the reduction of tensions with Israel is seen by analysts as the main reason for rial’s rebound, government intervention in the markets is always a factor in Tehran.

There are limited sources for the black market to obtain hard currencies, such as US dollars, euros, British pounds or Canadian dollars. The black market’s cash currency flows are mostly from small or individual sources. As a result, when the rial falls sharply and the government decides to intervene, it injects a few tens of millions of US dollars’ worth of hard currencies into the market.

The amount and frequency of these interventions are usually treated as state secrets, but occasionally hints appear in the media.

However, bad news about higher prices for consumers continue to be sporadically reported in Tehran media and on social media. Usually, it takes a few weeks for rial’s fall to impact prices and the annual inflation rate. Local media have reported in the past two weeks have that housing costs and food prices have been rising, with a middle-class family now forced to pay at least $250 a month for rent, which is more than ordinary salaries. Consumption of meat also continues to decline, as one kilogram of meat could cost 5% or more of monthly wages.

The new president, to be elected at the end of June, will face the monumental task of addressing economic challenges that have become increasingly difficult due to ongoing oil-export and banking restrictions. Without exceeding roughly $70 billion in oil exports, the government continually faces significant budget deficits and is forced to print money.

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