By Isla Lamont
In official statements, Iran is rumored to be abandoning the use of the U.S. dollar. The decision was announced January 29 by the Central Bank of Iran governor Valiollah Seif. The change will become effective on March 21, the start of the new fiscal year.
As a disclaimer, I say “rumored” because Forbes is the only reputable news source reporting the event, unless you’re partial to right wing blogs whose angles are all about jet fuel and steel beams. According to Forbes contributor on Middle Eastern economics, Dominic Dudley, the announcement was aired in Iran and reported by a local English-language newspaper, the Financial Tribune.
Conspiracy theories are already in the works, with many suggesting that the move will spark U.S. forces to interfere once again with the Iranian government under the cloak of economic liberation. The most common theory for the abandonment is that it is a retaliation against President Trump for his executive order banning immigration from seven Middle Eastern countries including Iran, before the executive order was overturned by federal judge James Robart. The Iranian government has since vowed to take “reciprocal measures” and stop issuing visas to U.S. citizens.
Whether speculation, fact, or a combination of the two, the entire scenario exposes the danger of sticky international relations and its effects on the U.S. economy. It may be obvious how imposing unilateral tariffs or striking international trade deals have economic impacts, but what I’ve found to be less understood is the power of currencies.
It is common for countries with relatively weak currencies to use a globally accepted currency for international trade. For example, the Rial is the official Iranian currency , which currently trades for 0.00003085 to 1 USD. The dollar is relatively one of the strongest currencies in the world and considered the top supernational currency. It is backed by the perceived trustworthiness of a country, or more simply put, its reliability for paying back its debts; a dollar is only a piece of paper until a state believes it is worth something.
It is also important to understand that the currency exchange market is a self-fulfilling prophecy: If enough investors believe that a country has a poor or unreliable economy, they will pull investment in that currency. Markets reflect the investors’ movements and cycles accordingly.
This explanation is an oversimplification of a very complex market, but my point is that if the U.S. dollar gets dropped by other countries, then the dollar’s entire value will weaken. Goods will become more expensive to buy, and the U.S. will receive less for our already deficient amount of exports. GDP shrinkage will almost undoubtedly follow, meaning that large outstanding debts to China and others will repay less than what its dollar attempts to purchase.
Iran dropping the dollar is not a problem in itself – it is a negligible trading partner, thanks to decades of U.S.-imposed sanctions. The issue lies in precedence and the slippery slope of monetary replacement. As soon as the snowball effect begins, it could wreak havoc on the American economy. Standard & Poor already downgraded the U.S. credit rating from AAA, the highest possible, to AA+ in 2016, sending shockwaves through the foreign exchange market.
Policies implemented by the U.S. are important to every citizen, but even more important is that in our current political climate, something as simple as a nasty tweet or criticism from our POTUS could have long-reaching consequences, especially if done repeatedly.