Q: What effect will Israel's airstrikes on Iran have on any potential revaluation of the Iraqi dinar?
A: This week's Israeli airstrikes on Iran, targeting nuclear and military sites, will likely have a negative effect on any potential revaluation of the Iraqi Dinar, at least in the short term. Here's why:
Increased Regional Instability
The conflict between Israel and Iran is a major source of instability in the Middle East. Iraq, being a direct neighbour to Iran and having complex political and economic ties with both countries, is highly susceptible to the fallout from such tensions. Increased regional conflict generally leads to capital flight and a preference for safer currencies like the US dollar, which puts downward pressure on local currencies like the Iraqi Dinar .
Safe-Haven Demand for USD
As investors and even ordinary citizens become more apprehensive about the future, they tend to move their assets into more stable and liquid currencies. The US dollar is traditionally seen as a global safe-haven currency. This increased demand for USD in Iraq would further weaken the Dinar against the dollar in the parallel markets, making any revaluation less likely.
Impact on Oil Prices
While a spike in oil prices due to regional conflict might seem beneficial for an oil-dependent economy like Iraq's, the immediate effect on the Dinar is often outweighed by the increased instability. Furthermore, if the conflict were to escalate and impact shipping routes like the Strait of Hormuz, Iraq's oil export revenues could be severely affected, which would be detrimental to the Dinar.
Smuggling and Sanctions Concerns
Iraq has faced challenges with dollar smuggling to Iran, partly due to US sanctions on Iran. Escalated tensions and potential new sanctions could exacerbate these issues, further disrupting Iraq's financial system and the Dinar's stability.
Political and Economic Uncertainty in Iraq
The Iraqi Dinar's value is already influenced by a range of internal factors, including political stability, government spending, and efforts to control corruption. Regional conflicts add another layer of uncertainty, making it harder for the Central Bank of Iraq to manage the exchange rate and implement policies that could lead to a revaluation.