REGIONAL FX HEADLINES Tuesday, December 19, 2006
Inflation-fighting move attracts dinar speculators
Inflation-fighting move attracts dinar speculators
An unexpected bright spot has appeared in this war-ravaged Iraqi capital: The national currency is strengthening against the U.S. dollar.
The dinar appreciated last month to about 1,400 dinars to the dollar, near its two-year low, triggering a dinar-buying frenzy among currency traders.
''I had people call to sell $150,000, $100,000. I had to tell them I didn't have that many dinars,'' said Alaa al Shemry, deputy manager at the Beirut Exchange Co., where he sat last week, watching a man sell dollars for the blue 5,000-dinar notes adorned with waterfalls and desert fortresses.
Economists and investors say the dinar's rise is temporary and largely driven by the Iraqi Central Bank, which is buying the currency as it seeks to raise interest rates to combat rampant inflation. But that hasn't stopped currency speculators from seeking to cash in.
A.F. Alhajji, an associate professor of economics at Ohio Northern University who has studied the Iraqi economy for 15 years, received e-mail from Middle East currency speculators urging him to buy Iraqi dinars, similar to messages he got after the dinar was issued in 2004 at a rate of 4,000 per dollar.
Alhajji says he watched teenagers in Jordan and Saudi Arabia respond to the e-mail, buying up the currency.
''They seriously think they can gain money by buying Iraqi dinars. This has become like a fever over there,'' he said.
And not just over there.
In Danbury, Conn., Jeff Pasquarella is buying billions of Iraqi dinars for customers through his currency-trading Web site, Bet-OnIraq.com, which sells the Iraqi currency ''because liberty breeds prosperity.'' EDinar Financial in Los Angeles and other similar companies have popped up from Nevada to Wisconsin.
At Dinar Trade in Brentwood, Tenn., sales dropped off during the past few months but picked up again during the last two weeks as many of the 54,000 customers took a renewed interest in the dinar, an employee said. The company expects the dinar to appreciate 10 percent to 20 percent in value, he said.
''Picture Iraq as a company selling stock,'' the Web site says, ''Each dinar you purchase represents a share in Iraq's bright future.''
Some economists say they are surprised at the dinar's rise, given Iraq's economy is still in shambles, with trade and major industries such as agriculture and oil crippled by the ongoing conflict.
Electricity in the capital is so sporadic that the Iraq Stock Exchange — which is preparing to switch from white erasable to electronic boards on the trading floor — can still only count on two hours of power a day. Two weeks ago, three car bombs exploded in markets near the Central Bank of Iraq, killing at least 68 people, injuring 111 and destroying 22 businesses, police said.
The dinar's price is determined at street-side foreign exchanges and daily dollar auctions at the Central Bank. Each weekday except Friday, the Muslim day of prayer, traders from 30 state-run and private banks arrive at the Central Bank in downtown Baghdad, each bearing an envelope listing the amount of dollars they wish to buy and a bid price. Bank managers confer and set the price.
The central bank is widely believed to be forcing the exchange rate down to 1,000 dinars per dollar, in line with the Saudi riyad, and the Jordanian and Kuwaiti dinars.
Ahmed Salman Jabouri, the deputy Central Bank governor who oversees the foreign exchange market, said Iraqi banks were buying up dinars, reversing a recent trend.
Under a multiyear agreement with the International Monetary Fund, part of the nation's reconstruction effort, Iraq is required to increase its dollar reserves and bring inflation down to 15 percent. During the past two years, the bank's dollar reserves about doubled, record show, and now total about $11 billion, while inflation is up 50 percent this year, Jabouri said, citing Iraqi government statistics.
An IMF report last May showed inflation of 58 percent during the previous 12 months, compared with 32 percent the year before.
Economists and investors put inflation even higher, at 70 percent to 80 percent, and the Central Bank has predicted inflation will increase 15 percent this year.
A Western official in Baghdad said the Iraqi government is doing all it can to fight inflation.
''They're basically meeting their targets,'' he said. ''I think this is actually a good thing for Iraqi consumers.''
Others say the currency's rise amid the sectarian civil war is the result of the bank's dysfunctional money management.
''Given their history with money in Iraq, they should never have had a central bank,'' said Steve H. Hanke, a professor of applied economics and co-director of the Institute for Applied Economics and the Study of Business Enterprise at Johns Hopkins University in Baltimore.
He said Iraq should replace the central bank with the currency board it had before, or adopt a foreign currency.
Hanke called the dinar's rise ''both very dangerous and the worst of all possible worlds,'' because it is not curbing inflation.
''This is a major train wreck waiting to happen,'' he said.
Molly Hennessy-Fiske is a reporter for Los Angeles Times, a Tribune Publishing newspaper.
-- mcall.com
Inflation-fighting move attracts dinar speculators