Currency Market Wary of Iran

Kevin Plumberg, Reuters:

Iran's decision to withdraw investments from Europe to shield them from U.N. sanctions has unearthed an array of risks for currency investors to consider. READ MORE

Iran's reserves and investments are probably too small to rock the $1.9 trillion-a-day foreign exchange market.

Still, the dollar could feel a sting, analysts said, if the move by Iran influences other major crude exporters or further inflame the geopolitical standoff between Western nations and the world's fourth largest oil exporter over its nuclear ambitions.

"I don't think it is possible for Iran to take money out of both the United States and Europe," said Michael Woolfolk, senior currency strategist with Bank of New York. "There are just not sufficiently deep or liquid markets to place these sums of money," he added.

The move by Iran to transfer its assets is to preempt a potential asset freeze by the United Nations Security Council after Iran refused to relent to Western pressure to curb a nuclear program.

During the Iranian revolution in 1979 the U.S. government froze Iran's U.S. assets, the status of which remains in dispute.

If the asset transfer by Iran, a member of the Organization of Petroleum Exporting Countries, is the start of a move by Middle East oil producers to redirect revenues generated from oil sales, financial markets would indeed be affected.

"What we are concerned about is that going forward they may decide to remove petrodollars and redirect them elsewhere. If they do, it is negative for the bond market and ultimately for the U.S. dollar," Woolfolk said.

Iran in 2005 had foreign exchange reserves of $40 billion, according to the U.S. central intelligence agency's "World Factbook," and analysts say the country raises annual oil revenues of around $40 billion to $45 billion.

While Iran's portfolio of so-called petrodollars is not public, the U.S. Treasury tracks dollar-denominated long-term securities held by Middle East oil exporters. Of the $102.8 billion in this category as of June 2004, 63 percent was in equities, nearly 20 percent in Treasury debt, 7.5 percent in agency bonds and 9.5 percent in corporate bonds.

GOLD, OIL IMPACT

A complete overhaul of Iran's reserve portfolio is highly unlikely but some of the funds could be redirected to other assets, analysts said.

"Would it surprise me that they would change their whole asset allocation dramatically? That would be more surprising," said Alan Ruskin, chief international strategist with RBS Greenwich Capital in Greenwich, Connecticut.

"They could change some of it to something more country-neutral, like gold," he added.

Indeed, gold prices leaped to their highest in a quarter century on Friday, partly due to investors stashing money in a traditionally safe-haven asset because of heightened geopolitical concerns.

The euro briefly dipped to $1.2039 from $1.2070 as news Iran was transferring assets from its foreign accounts hit the market.

It is now trading at about $1.2130. A trader with a U.S. custody bank was surprised that the euro was relatively stable against the Swiss franc, often seen as a safe-haven investment.

Some analysts saw risks evolving for currencies other than the dollar and the euro.

"Delving into Iran's export mix to see what possible disruptions may surface should the U.N. Security Council impose sanctions on Iran for non-compliant behavior, causing Iran to retaliate in the form of curbing oil exports, Japan is most exposed," said David Mozina, head of foreign exchange strategy at Lehman Brothers in New York.

A quarter of Iran's exports make their way to Japan, the world's second largest economy, in the form of fuels and mining products, said Mozina.

"Hence this may have some sort of secondary effect on the yen," he added.

The dollar was unchanged from late Thursday, at 115.30 yen.

Many analysts see more impact on currencies from higher oil prices, which are vulnerable to supply-related spikes in the event tensions escalate with Iran.

"The combination of cold winter weather and a potential stand-off in the Arabian Gulf in the event of a military strike on Iran is causing many oil analysts to expect $80 per barrel oil as early as this quarter," said Ashraf Laidi, chief currency analyst with MG Financial.

"This would be especially the case if Iran manages to block the oil waterways in the strait of Hormuz, through which passes a quarter of the world's traded oil," Laidi said.