Tehran at a tipping point: The unraveling of the Iranian rial

Rudaw Net

a day ago

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The Iranian rial is once again making headlines for all the wrong reasons, especially its significant drop in value against the US dollar.
As of early August 2025, one dollar trades for nearly 929,000 rials on the free market - an alarming devaluation that reflects not just economic fragility, but also a deeper erosion of public trust and government control.
While Iranians have seen sharp currency declines before, this one is especially toxic as it is driven by a combination of key factors including high inflation, political stagnation and enduring international sanctions.
The free-market rate – which is now over seven times higher than it was in 2020 when it was around 130,000 rials – tells only part of the story. The real impact is felt on the streets of Tehran, where people are struggling with shrinking purchasing power and households are under immense psychological pressure. As a result, many are strategically shifting away from holding rials, instead opting for US dollars and digital assets to safeguard their savings.
Conflict, corrections and currency volatility
Currency traders and economists agree that Iran's economic woes are rooted in a long-standing mismatch between the country's economic realities and political climate. They argue that the most recent decline in the Iranian rial was specifically triggered by heightened regional tensions late last year.
Economist Mohammad Parsanezhad noted to the author that the exchange rate "diverged from its fundamental value due to an unfavorable political outlook, surpassing 1,000,000 rials per dollar." However, a subsequent wave of selling by speculators, who 'anticipated successful negotiations' and diplomatic breakthroughs, led to the first correction in the dollar's price, Parsanezhad added.
Moreover, a conflict erupted between Iran and Israel on June 13 when Israeli airstrikes in Iran targeted senior military commanders and nuclear scientists. Iran retaliated with missile and drone attacks on Israeli targets.
The conflict widened on June 22 after the United States bombed three Iranian nuclear sites, prompting Tehran to launch a retaliatory missile attack on a US base in Qatar. A ceasefire, brokered by Washington, took effect on June 24 and has largely held since.
Following the ceasefire, the rial saw a modest, but short-lived, recovery to around 870,000 in June, proving once again that with inflation rising and sanctions still in place, confidence in the local currency remains deeply shaken. Traders confirm this reporting that demand for US dollars and even cryptocurrencies like Tether is only intensifying.
Dual rates, divided markets
Another major issue is Iran's confusing dual exchange rate system. The Central Bank of Iran (CBI) maintains a subsidized rate of around 700,000 rials to the dollar for certain imports - a figure far below the open market's valuation. While this policy aims to mitigate inflation on essential goods, it forces businesses and importers to navigate two distinct economic environments.
According to Parsanezhad, the CBI primarily focuses on 'the formal subsidized exchange rate' rather than 'significantly targeting the open market rate.' This approach, while providing some temporary insulation for specific sectors, fails to restore widespread confidence in the currency. In fact, it underscores the government's limited tools and declining trust in its ability to manage the market-driven exchange rate.
Sanctions, inflation, and Iran's oil dilemma
At the heart of Iran's currency crisis is a chronic shortage of US dollars. The country's oil revenues - a crucial source of foreign currency - have been severely curtailed by international sanctions. As of early 2023, Iran exported around 1.2 million barrels per day (bpd) - a figure still well below its pre-sanctions export level of 2.5 million bpd. The ensuing dollar shortfall trickles down to every sector of the economy, from pharmaceuticals to small-scale trade and more.
Parsanezhad states, 'There is demand for dollars, but it is not being supplied sufficiently.' This has made it difficult for importers to access foreign currency, prompting consumers to brace for higher prices on anything connected to global supply chains. With no clear resolution to the sanctions in sight, this situation is unlikely to change soon.
Relentless inflation is another significant factor that continues to surge. While official figures put the rate near 35 percent, independent analysts, including those at the Tehran-based economic daily Donya-e Eqtesad, estimate annual inflation as high as 50 percent. This has caused the price of basic goods like rice and meat to double over the past 18 months. As a predictable consequence, money is expected to lose value faster than it can be spent, leading people to seek safer havens for their savings, such as gold, foreign currency, or digital assets.
Looking ahead: Slower decline, no recovery
Despite modest corrections this summer, most indicators suggest the rial's troubles are far from over. Analysts see 850,000 rials as a key support level, but not a floor. If inflation rises or political and security tensions flare up again, the currency could again push the currency past the 1,000,000 rial mark.
According to Parsanezhad, the rial's long-term trend is clear unless political conditions improve and sanctions ease. He warns, "The government's budget deficit has always led to money printing by the Central Bank [of Iran], which is inflationary. This has undoubtedly been one of the main drivers of the long-term, chronic rise of the exchange rate in Iran."
Iran's monetary base has expanded by nearly 40 percent year-on-year, fueling inflationary pressure. At the same time, non-oil exports, once a key to diversification, have stagnated. This has resulted in a current account deficit that further weakens the currency.
As Iranians grapple with a shrinking currency and rising costs, there is a growing sense that this is not just a financial crisis, but a crisis of confidence. The government's current approach, centered on dual exchange rates and reactive monetary policy, may buy time but fails to address the underlying structural imbalances.
To halt the slide of its national currency, Iran requires more than just temporary fixes. Stopping the devaluation of the Iranian rial necessitates a comprehensive overhaul of the country's economic governance and its international posture. These are profound changes that do not seem forthcoming in the near term.
Until such changes occur, the rial's decline may slow, but it is not expected to reverse.
Omar Ahmed is editor-in-chief of Rudaw's Economy Desk.
The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.