Iran central bank bolsters rial after sanctions plunge

REUTERS -- The Iranian rial strengthened by around 20 percent against the dollar on Wednesday after the central bank intervened to prop up the currency, Iranian media reported, recovering some of the sharp losses seen after imposition of new U.S. sanctions.

The rial dropped to a record low after U.S. President Barack Obama signed a bill on imposing fresh restrictions on the country's central bank on Saturday.

The sanctions, if fully implemented, could hamper the major oil producer's ability to sell oil on international markets.

Iranian authorities have played down any link between the weakening exchange rate and the imposition of the U.S. ban, saying necessary measures will be taken to maintain the value of the country's currency.

"The exchange rate of U.S. dollar, which was around 18,000 rials on Tuesday, has dropped to 14,000 on Wednesday," said the Jahan-e Eqtesad daily.

The dollar was traded at about 10,500 rials to the U.S. dollar last month.

The head of Iran's central bank Mahmoud Bahmani said the fluctuation in the foreign exchange market was a "psychological war", created by Iran's enemies, the daily Kayhan reported.

"The central bank is trying to use appealing financial and monitory tools ... to encourage people to save their money in banks," Bahmani said.

Rising inflation, a reduction in bank interest for savers and concerns over potential military strike by the United States and Israel have all pushed Iranians to seek hard currency as a safe haven for their wealth.

"The central Bank has been asked to inject more foreign currency into the market if necessary," said Minister of Industry, Mine and Commerce Mehdi Ghazanfari. He did not elaborate.

Some analysts suggest that the government is making profit out of the soaring price of dollars but the domestic currency's drop has created concerns among ordinary Iranians.

The price of staple foods has increased by up to 40 percent in recent months and many critics have put the blame on increasing isolation brought about by President Mahmoud Ahmadinejad's economic and foreign policies.

WARNING WASHINGTON

Tension has increased between Iran and the West over the country's nuclear programme, which Washington and its allies say is a cover to build bombs.

Iran has been hit by foreign sanctions, including four rounds of U.N. sanctions over its refusal to halt its sensitive nuclear work as demanded by the U.N. Security Council.

Iran has repeatedly said it will not change its nuclear course because of sanctions, warning that it will close off the vital crude shipping route of the Strait of Hormuz in the Gulf if sanctions were imposed on its oil exports.

Tehran's 10 days of naval wargames in the Gulf, that ended on Monday, and threats made by Iranian officials over the Strait rattled oil markets and pushed up the price of crude.

The United States and Israel have not ruled out military option if diplomacy fails to resolve Iran's nuclear dispute. Tehran denies the West's claim that it is after nuclear bomb, saying its response to any military strike will be firm.

Iran's economy is 60 percent reliant on petrodollars and any sanctions imposed on its oil income will put further pressure on the country's ailing economy.

Iranian top military officials said Tehran will take action if a U.S. aircraft carrier, which left the Gulf because of Iranian naval exercises, returned to the area.

"We have repeatedly said that not only there is no need for the presence of the foreign forces in the Persian Gulf but it is also harmful," the Semi-official Fars news agency quoted Defence Minister Ahmad Vahidi as saying on Wednesday.