Thu Dec 13, 2007 9:21am EST
by Mussab Al-Khairalla
BAGHDAD (Reuters) - A bubble in the Iraqi currency popped on Thursday after the central bank denied rumors of a revaluation, causing confusion on streets where the main risk of trading is usually violent death, not currency fluctuations.
A normally stable currency backed by billions of dollars in oil revenue, the Iraqi dinar had risen by 10 percent practically overnight. But a sudden bull run on the dinar proved too good to be true.
Street traders who had raised the price of Iraq's currency over the past few days abruptly lowered it again after the central bank denied it was trying to haul the currency up to sudden parity with the U.S. dollar.
The Iraqi dinar had been gaining value slowly for months after the government announced a plan to gradually raise the exchange rate, now officially 1,210 to the U.S. dollar.
But the past week had seen the rate on Iraq's streets climb suddenly as high as 1,080 as rumors spread through Baghdad that the government was planning to move the official rate suddenly to 1,000 and remove three zeros, making a dinar worth $1.
Not so, the central bank said, blaming speculators.
"An authorized source at the Central Bank of Iraq denies rumors that claimed the bank wished to value the dollar at 1,000 dinars, or less or more, or change the currency denominations, or remove the zeros from the present currency," the central bank said in a statement.
"The Central Bank is following the phenomenon of less demand for the dollar closely," it said. "Information or widespread rumors like this are designed to allow very quick trading benefits for some at the expense of the people."
SELLING DOLLARS
At Abu Mohammed's storefront currency exchange shop in Baghdad's central Karrada district, the price of a dollar was back up to 1,180 dinars on Thursday, close to the official rate, after falling as low as 1,080 on Wednesday.
Abu Mohammed earned a profit on Wednesday from customers who rushed to get rid of dollars as they lost their value.
"I feel sorry for those who traded yesterday, but what can I do?" he said.
The currency moves caused confusion in shops. Most Iraqis receive salaries in dinars but stores list prices for expensive imported items in dollars.
Refrigerator shop owner Abu Ibrahim hadn't yet heard that the dollar was recovering and thought he was now stuck with fridges priced in a U.S. currency worth far less than when he bought them.
"The central bank has to change the rate slowly if it wants to succeed. If someone has a contract a year ago in dollars and everything become more expensive for him, then he won't be able to gain any profits."
Iraq's currency stability is a point of pride, both for the government and its U.S. backers.
Thanks to rising oil prices and increasing exports, Iraq's public finances are in surprisingly good shape for a country that has seen nearly five years of war follow 12 years of U.N. sanctions. Iraq exports nearly 2 million barrels of oil per day and next year's budget is expected to be $48 billion.
(Writing by Peter Graff; Editing by Caroline Drees)
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