The forex rate of a particular currency is directly tied to its economy and geopolitical situation of that particular country. Although price fluctuations in forex rates between two currencies follow the demand and supply trend based on “Purchasing Power Parity” and interest rates, the case of Iraqi dinar (IQD) becomes a special one due to its current situation. (PPP is an important economic concept; watch Investopedia's helpful video on the subject.)
The IMF, which monitors Iraq’s economy, is using a single fixed rate of 1170 IQD per US$. The official market rate of IQD-US$ keeps hovering around this fixed price. But in reality, a lot of variation exists in the bid/ask quotes for buy/sell prices at the various foreign exchange dealers, as the Iraqi dinar is no longer easily traded. The bid-ask spread is pretty wide, and dealers (legitimate or illegitimate) are known to charge a high mark-up fee for any transactions inIQD.
The Iraqi dinar has special attributes, as its valuation and volatility are tied to developments in Iraq. Given the reality of Iraq's being a war-torn country, a number of factors exacerbate risk,including: 1) multiple factions trying to control different parts of land; and 2) the withdrawal of Western countries.
Even if one is willing to take the bet based entirely on chance, the unknowns are considerable.
Changes in the price of Iraqi dinar will depend on lots of factors, including the following:
How soon the war comes to an end
Unless business participants and investors can be assured of a peaceful, secure and trustworthy atmosphere for making investments, the economy will struggle to recover. Investors already have to deal with enough risk as it is even under the best of circumstances; hence, they look for stable regions without political or other disturbances. The current war-like situation is the major deterrent in the Iraqi economy's recovery, and thus in the improvement in Iraqi dinar pricing. The sooner Iraq achieves normalcy, the better prospect the economy and the dinar will have for recovery.
Whether the country remains unified or is heading for a split
In the event of the latter, will the new authorities honor the debt and obligations of the existing currency and economy? If not, then it will be a sunk cost for all investors holding Iraqi dinars. High price fluctuations will continue on the downward trend, with much wider spreads in the unofficial forex trading markets, until the situation becomes clear at ground level.
Whether Western countries are ready to re-engage in rebuilding Iraq and its economy
Western countries have been phasing out their presence in Iraq. This may be a cause for the current disturbances that have sprung up. Just the sheer engagement of Western countries can give a kick-start to help building the investor confidence, thereby improving the economy and improving the forex rate.
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