To the surprise of many currency traders, the Iraqi Dinar has been staging a gradual but noticeable improvement in value against the US dollar. Many mainstream investment advisors have been casting doubt on this possibility for a long time. But the rise in the value of the dinar has become a distinct reality. Will it continue?
Based on the most recent exchange rates, the Iraqi Dinar is currently trading at 1,185 to one US Dollar. It traded as high as 1,195 to the US Dollar as recently as early February. But both exchange rates are well above the 1,157 rate the dinar was trading at last summer. From high to low, this represents an increase of nearly 4% by the dinar against the US dollar.
Why did the dinar rise against the dollar, and what should you know before investing?
For the most part, the dinar seems to be responding to well-documented trends. These trends have been in motion since at least the middle of 2017. What’s more, they seem destined to continue for the foreseeable future.
Let’s look at each…
THE WEAKENING OF THE US DOLLAR
The value of the US Dollar has itself been falling against other currencies. For example, as recently as last April, the dollar traded at nearly 0.95 against the Euro. But more recently it’s traded down near 0.80 against the Euro. That’s a decline of more than 15% in less than a year.
We see the same situation with the dollar against the Japanese yen. As recently as December, the dollar traded at 113 vs the yen. Today it’s trading at around 105 against the yen, a decline of nearly 8% in a space of just three months.
The declining dollar is lining up as a long-term trend. This is hardly an unusual development. Countries frequently devalue their currencies as a means to becoming more competitive.
The recently proposed trade tariffs with China by the Trump Administration may also hold a clue. The US has a massive trade deficit with China that the administration wants to shrink. The imposition of tariffs is thought to make Chinese goods more expensive in the US. Theoretically at least, that will lower imports from China.
But perhaps more likely is the intention of the government to keep the economy going in the face of rising interest rates.
The Fed Funds rate, which hovered between zero and 0.25% between 2009 and 2015, has been making small, stairstep increases since. The rate now sits at 1.42%. The US government may be using a weaker dollar as a way to minimize the economic impact of higher interest rates.
The weaker dollar means American-made goods become less expensive in foreign markets. At the same time, imports into the US become more expensive. That will cause a decline in the sale of imported goods in the US. The combination of the two should lower the trade deficit, and produce a stronger GDP.
There’s no way to know that strategy will work. But what’s more important in regard to foreign currency valuations is that it’s a trend that’s unlikely to reverse anytime soon. This should strengthen the value of the Iraqi Dinar against the US dollar, at least for the foreseeable future.
THE PRICE OF OIL HAS RISEN SHARPLY
In July of 2017 the price of oil traded at less than $44 per barrel (West Texas Intermediate). But in March, oil is now at more than $65 per barrel. That’s an increase in the oil price by nearly 50% in less than nine months.
This is a major factor for the Iraqi economy, and one that’s pointing to a continuation of increasing value for the dinar.
At more than 142 billion barrels, Iraq has the fifth largest oil reserves in the world, after Venezuela, Saudi Arabia, Canada and Iran. It’s also the world’s fourth-largest oil producer, after Russia, Saudi Arabia in the US. Iraq produces nearly 4.5 million barrels of oil per day, and is one of the world’s leading exporters.
Since oil is Iraq’s major export, and source of foreign currency, a rise in the price of the commodity is a major positive for the country.
And despite increased production from US fracking, Iraq remains one of the most stable sources of oil in the world. What’s more, it produces large quantities of the more desirable light grades of oil. That’s the type that more easily converts into gasoline and diesel fuel, the primary economic products of oil.
Meanwhile, turmoil in various other major oil-producing countries is underpinning the rise in oil prices. Because of its hostility to the West, and the US in particular, Iran is a questionable source of oil exports. Libya, once a major oil exporter, has still not recovered from the “Arab Spring” revolt of several years ago.
And Venezuela – the source of the world’s largest oil reserves – is currently experiencing major economic, financial and political turmoil. Continued exports from the country, and at what level, can’t be accurately predicted at this point. The country has not come to grips with its fundamental problems, making its entire oil industry in doubt.
At the same time, production from once reliable sources, like Mexico and Britain, has been in steady decline for several years. That means countries like Iraq, that have large, stable oil reserves, hold greater promise as reliable suppliers in the near future.
GEOPOLITICAL TENSIONS ARE RISING
We just mentioned significant troubles in places like Iran, Libya, and Venezuela. But those situations have been going on for several years, and none threatens to spill over into violence.
Of greater significance is the potential for military conflict in various places. Though the situation with Iran seems to be on a slow, steady boil, threats and counter-threats continue to be thrown back-and-forth. The West could be drawn into a military conflict with Iran by accident or miscalculation. Since Iran controls the Straits of Hormuz, where much of the world oil passes, any kind of military conflict will have a sudden and dramatic effect on the price of oil.
The bigger threat of the moment seems to be North Korea. Since the country now has nuclear weapons, direct military conflict seems to be unlikely. But the standoff between the US and North Korea – which is at least unofficially backed by Russia and China – is creating a tense global atmosphere.
It’s not just actual warfare that disturbs economies in financial markets. The perpetual threat of warfare can keep things unsettled for a very long time. The situation with North Korea has already been going on for several years. No easy solution seems to be available, promising more of the same going forward. It’s likely we’ll continue to experience times of relative calm, followed by episodes putting us on the brink of war.
But perhaps the bigger geopolitical tension is happening in the South China Sea. China, in looking to assert its rising power, is claiming control of the entire body of water. Since much of the world’s shipping passes through the South China Sea, the US has been challenging that authority, by sailing navy ships and flying aircraft through it.
The US sees this as a right of passage, while China sees it as a threat.
Up to this point, it’s been primarily a war of words, and of maneuvering military forces. Once again, the threat of a shooting war unnerves the world’s financial markets. This can cause disruptions in financial markets, including currency valuations.
Since Iraq has a disproportionate share of the world oil, and oil is the world’s most important commodity, it will likely rise in value in any episode of open warfare. Iraq – and its currency – would become strategically more important than it is right now.
THE FUTURE DIRECTION OF THE IRAQI DINAR
The near 4% increase in the value of the Iraqi Dinar vs. the US Dollar may seem small. But it’s also as unexpected as it is small, certainly by the experts.
It’s probably considered unexpected mainly because long-term trends are shifting. The type of backdrop dominated by low-interest rates, a strong economy, and predictable financial markets seems to be coming to an end. The geopolitical situation is certainly more explosive than it’s been at any time since the end of the Cold War.
And oil remains a major variable. Despite claims of nations around the world to shift toward alternative energy sources, oil remains the world’s most important energy source. This is evidenced by the fact that worldwide consumption of oil is higher than it’s ever been. It’s clear this trend will continue for the foreseeable future.
The alternatives to oil are simply too expensive to replace in any significant way. As well, oil’s value as a transportation fuel is unsurpassed. As a high density, liquid energy source, it’s perfectly suited for use in automobiles and aircraft. And the economic uses of oil go way beyond cars and planes. It’s also used to power ships, and in some countries, trains.
In addition, it’s other industrial uses, particularly in the manufacturing of various products, has exploded in recent decades. Even apart from oil’s value as an energy source, the world can no longer live without it as an industrial material.
It could well be that the decline of stability in other countries, particularly the US, could strengthen Iraq’s position in the world. This will have a positive effect on the Iraqi Dinar, and will likely result in a steady increase in the value of the currency.
There’s yet another side to this trend that shouldn’t be ignored. Iraq’s political and economic situations have been bumping along the bottom since the US invasion 15 years ago. Iraq’s fortunes can only go up from here, especially given that the internal situations in surrounding countries, like Syria and Turkey, continue to deteriorate.
The seemingly small 4% increase since last summer could be the beginning of a profitable long-term trend. Are you ready to jump in?