What you will learn in this lesson
The dollar rate can sit still for weeks and then jump in a matter of days. Instead of listing "the news," this lesson builds a mechanism framework with four channels you can file any headline into: the FX supply and demand balance, the rial layer (money supply and inflation), expectations, and political or sanctions shocks. By the end you will be able to ask which side of the scale a given piece of news weighs down, and by what route it reaches the price.
Definitions
First, let us fix a few terms.
- Exchange rate: the price of one unit of a foreign currency in domestic money. Saying "the dollar is at 180,000 tomans" means buying one dollar costs 180,000 tomans.
- Money supply (naqdinegi): the total of money and quasi-money in the economy, that is, banknotes and demand deposits plus term deposits. It is the volume of rials chasing goods, assets, and foreign currency.
- Monetary base: the central bank's liabilities, that is, currency in circulation plus banks' reserves held at the central bank. The base turns into the much larger money supply through bank credit creation.
- Inflation: the growth rate of the general price level. "Point-to-point inflation" is the change in the price index versus the same month a year earlier; "annual inflation" compares the twelve months ending in the current month with the same period a year before.
- Inflation expectations: what economic actors believe about future inflation. Expectations are not merely a reflection of the past; they are a price-setting force in the present.
- FX supply: the inflow of foreign currency into the economy, mainly from oil and non-oil exports, services, and remittances.
- FX demand: the need for foreign currency to import goods and services, to travel, for medical care and study, plus savings demand, meaning currency bought not for spending but as a store of value.
The mechanism: four channels that set the rate
Channel one: the supply and demand balance
The simplest layer is the market itself: if the inflow of foreign currency shrinks or demand rises, the price goes up. What distinguishes Iran's economy is that a large share of FX supply is tied to a largely external variable, namely export income and above all crude oil and condensates. When the volume of those sales, or the speed at which the proceeds are collected, falls, the supply side of the scale gets lighter even if nothing new has happened inside the domestic economy. We cover how supply and demand meet to form a price separately in How Markets Discover Prices.
Channel two: the rial layer, money supply and inflation
The second channel comes from the rial side, not the dollar side. An exchange rate is a ratio: how many rials for one dollar. If the volume of rials grows far faster than the output of goods and services, each rial is worth less and the nominal price of everything, from housing and gold to the dollar, rises. This is why the long-run trend of the exchange rate in high-inflation economies is less a story about the dollar than a story about the domestic currency.
Two real figures make this layer concrete. The Central Bank of Iran put money supply growth in Ordibehesht 1405 (April to May 2026) at about 52 percent year on year. On the price side, the Statistical Centre of Iran reported point-to-point household inflation for Khordad 1405 (May to June 2026) at 88.6 percent, with annual inflation at 62.0 percent. When numbers like these persist for months, it is a stable exchange rate that needs explaining, not a rising one.
Channel three: expectations
The third channel is where most short-term jumps are made. Someone holding foreign currency today will not sell it below the price they think it will fetch tomorrow, and a buyer who expects it to get more expensive brings tomorrow's purchase forward to today. The result is that part of the expected future is priced in right now. This explains why the rate sometimes moves before any real change in supply or demand, and why a single headline can shift the market without one extra dollar entering or leaving the economy.
Channel four: political and sanctions shocks
Political events and trade or banking restrictions usually act on two of the other channels at once, which is why their effect looks so large. On one hand they make access to export earnings, and the ability to move that money, harder or slower, which lightens the supply side of the scale and raises the cost of every transaction. On the other hand they raise uncertainty and shift expectations. The teaching point is that a headline's effect on price depends on its distance from what the market already expected, not on whether it looks "good" or "bad": news the market has already priced in may move nothing at all on the day it breaks.
A worked example (hypothetical)
The figures below are entirely hypothetical and exist only to show the mechanism.
Imagine a hypothetical country where, in year one, the money supply is 1,000 units and the annual inflow of foreign currency is 10 dollars. If all of that money faces all of that currency, the rough equilibrium rate is 1,000 divided by 10, that is, 100 units of domestic money per dollar.
Year two: the money supply grows 50 percent to 1,500, while FX supply stays at 10 dollars. The rate becomes 1,500 divided by 10, that is, 150. Nothing happened in the currency market here; the entire change came through channel two.
Year three: the money supply holds at 1,500, but an export restriction cuts FX supply from 10 to 8 dollars. The rate becomes 1,500 divided by 8, that is, 187.5. This time the entire change came through channel one.
Now add channel three: if the market guesses at the start of year three that supply will fall to 8, it does not wait until year end. Sellers price off 187.5 from day one, and much of the move happens before the reality does. This simple exercise shows why a single rate can have three completely different roots.
In Iran's market
Three local points complete the framework.
One: Iran does not have a single rate. The free-market rate, the rate at the Iran Currency and Gold Exchange Centre, and preferential rates each serve a different slice of demand and do not necessarily move together. At midday on 4 Mordad 1405 (26 July 2026), for example, the free-market dollar traded around 187,385 tomans, while the Exchange Centre's dollar remittance selling rate that day was about 151,569 tomans, a gap of close to 24 percent. Separating these rates is the subject of the lesson Iran's Multiple Exchange Rates: Why Is There More Than One Dollar Price?, and you can follow the current rate on the dollar price page.
Two: savings demand carries unusual weight in Iran. In an economy where rial deposit rates have lagged inflation for years, some households buy foreign currency not to import or travel but to preserve the value of their savings. That means part of FX demand depends on the quality of rial alternatives: the more negative the real return on rial instruments, the more pressure lands on the dollar.
Three: the policymaker holds tools aimed at these very channels. Supplying currency through the Exchange Centre, requiring exporters to repatriate their foreign earnings, running coin and currency auctions, and changing the yield on rial instruments each try to take pressure off one of the four channels above. These tools typically reach expectations faster than they reach the actual flow of currency.
Common mistakes
- "The dollar rate is purely political." Political events explain the timing of moves, but the long-run slope is set mostly by channel two. Two economies with similar political headlines and different money-supply growth follow different currency paths.
- "Money supply is just a number with no link to the market." The opposite error is equally wrong: the relationship between money supply and the exchange rate is not a precise arithmetic rule. It bends with lags, with changes in the velocity of money, and with parallel policies. It explains direction, not tomorrow's number.
- "Good news means the dollar must fall." What moves a price is the distance between the news and what was already expected. News that has been priced in can be neutral, or even work in reverse, on the day it lands.
- "The Exchange Centre rate is the real one and the rest is a bubble." Each rate is real for its own market and its own demand. The correct comparison is between like-for-like rates, not declaring one of them the true price.
- "It has gone up, so I should buy." This lesson is about the mechanism of price and carries no buy or sell advice. Knowing the channels helps you read the news better; it does not let you forecast.
Summary
The dollar rate is the product of four simultaneous forces: the inflow and outflow of foreign currency, the volume of rials circulating in the economy, what the market expects of tomorrow, and shocks that move both sides at once. Channel two sets the long-run slope, channel three sets the timing of the jumps, and channels one and four set their size. Next time you read a currency headline, ask which channel it enters through before you judge anything.
The previous lesson covered rial instruments and the real return referred to above: Fixed Income and T-Bills (Akhza): Why a Bond's Price Falls When Rates Rise. The full lesson list is at Sahmino Academy.
Analysis
Analysis
Analysis
Analysis