Dinar boosted by growing confidence in Iraq recovery

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Dinar boosted by growing confidence in Iraq recovery

Reuters, 01.12.04, 6:36 AM ET

Sources from FORBES !!

By Suleiman al-Khalidi

BAGHDAD, Jan 12 (Reuters) - Iraq's dinar currency climbed back to 1,500 to the dollar last week, the postwar high reached a month after the fall of Baghdad, helped by growing confidence that the country is on the path to recovery, traders said.

The dinar has risen steadily in recent months after falling back to 2,200 last year on concerns about security. It was at 2,000 during the final year of Saddam Hussein's rule.

Currency traders say that for the first time since the end of major combat last April more Iraqis are holding on to the dinar as a savings vehicle after years of hoarding dollars.

"Before, at the end of a working day, I wouldn't keep my Iraqi dinars and would change them to dollars. Now I am increasingly keeping my holdings in the dinar," said hotel owner Alaa Jabari.

Demand for the dinar has been boosted by a surge in currency smuggling which has seen hundreds of millions of dinars taken to Kuwait, Jordan, Egypt and the other Arab states, traders said.

"There is strong demand from neighbouring countries. They think the dinar is undervalued compared to the dollar and they expect the dinar to rise in the medium and long term," said Mohammad Hassan al-Jashmae, who runs a currency exchange firm.

Bankers say that by pushing the dinar to around 1,500 to the dollar, Iraq's central bank has attained its initial target to bolster the local currency, a step towards beefing up the incomes of state employees whose salaries are now paid in dinars.

The dinar is also being helped by a glut of dollars in the market from U.S. Army payments to contractors and thousands of Iranian Shi'ite pilgrims visiting the country's religious shrines, along with the sales of dollars by speculators.

"The supply of dollars in the market exceeds demand ..and currency speculators from neighbouring countries are changing their dollars to dinars... there is a surplus," said Ali Jamil, a currency trader.

Confidence in the new currency is being underpinned by a widespread perception that Washington will pump billions of dollars into reconstruction projects this year.

"America is saying: I want to restore your economy. Before the war U.N. sanctions were pushing the economy towards more deterioration," said Zuhair Ali, a currency trader.

Last October the central bank implemented a U.S. plan to replace the old currency with new notes printed in Britain. The old dinar bearing the face of Saddam Hussein will cease to be legal tender as of January 15.

As the new currency began to be introduced, the central bank began intervening in the foreign exchange market for the first time in years, selling dollars from the country's oil revenues to strengthen the dinar.

The limited circulation of the new currency as compared to the open-ended printing of old notes by Saddam's political leadership has also helped the dinar.

"Printing is limited, it's not like before when it didn't have any value and was printed in abundance without meaning because somone high up in Saddam's circle wanted to pump in money for the war effort," said Firas Shabaan, another currency trader.

For many Iraqis the strengthened dinar is a sign their potentially rich country is on the path to recovery.

Many remember the 1980s when the dinar was worth three dollars before war and sanctions caused its collapse.

"We have our dignity ... Our dinar will go back to its strength one day when one dinar was worth three dollars because we are a very rich country," said dealer Alaa Mandalawi.

Copyright 2004, Reuters News Service

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