Iraqi dinar falls 17% against dollar amid US restrictions over Iran deals

The Iraqi dinar has fallen below the official exchange rate with the US dollar after new dollar restrictions on a group of Iraqi banks, leading to new protests in the country.

The dinar is currently trading at 1,570 to the dollar on the street. This is around 17% below the official rate of 1,300 dinars to the dollar, Bloomberg reported on Thursday.

The currency fell after new action by the US government to curb the flow of dollars to sanctioned Iran. The Wall Street Journal reported last week that the US Treasury Department and the Federal Reserve Bank of New York barred 14 Iraqi banks from dollar transactions. Restriction on US dollars limit the currency's supply, thus boosting its value against the dinar. 

The Treasury Department and the Federal Reserve Bank of New York did not respond to Al-Monitor’s request for comment.

The Central Bank of Iraq issued a statement in response to the news, saying the barred banks can still conduct business in Iraqi dinars. The Central Bank also said that these banks only constitute 8% of foreign transfers, according to a statement.

The dinar’s depreciation led to protests in Baghdad outside the central bank on Wednesday, with people demanding government intervention to prevent the currency from falling further.

Authorities are trying to remain optimistic about the situation. In an interview with the official Iraqi News Agency on Wednesday, Central Bank Gov. Ali al-Allaq said there is no indication from the US government of further action against Iraqi banks. He also called the fall in the dinar’s value “temporary.”

Meanwhile, the 14 sanctioned banks are warning that the action could further hurt the dinar and foreign investment in Iraq.

“Our banks have nothing to do with political tensions, but are independent financial institutions,” representative of the banks Haider Al Shamma told reporters on Wednesday, according to Reuters.

Background: The Iraqi dinar traded against the dollar at a rate of 1,200 to 1 for years until 2020, when Iraq lowered the rate to 1,460 due to decreased oil prices and a liquidity crisis. The US Federal Reserve began exercising greater scrutiny over Iraq due to smuggling of dollars to Iran late last year, and this caused the dinar to sink further below the official rate.

In February, the central bank revised the official rate to 1,300 dinars to the dollar.

Know more: There have been some indications that Iraq is interested in other currencies besides the US dollar. In February, the central bank said Iraq would trade with China in yuan. Several Middle Eastern states have expressed interest in trading in yuan, including Iran and the United Arab Emirates.