Investing in currencies can be wildly risky and volatile.
It can also drive massive gains from relatively small investments.
Just about every currency can be traded against another in real-time, providing tons of potential profits from most currencies in the world.
But what about the Iraqi dinar?
Why are people so crazy about it these days?
Is it really so unique and exotic?
The Iraqi dinar is a currency that has acquired quite a bit of popularity since the Iraq War began in 2003. That popularity has increased tenfold amidst speculation that it will dramatically increase in value.
Why else would the United States government be hoarding more of it than any other nation on the planet (excluding Iraq)?
Did Bush know something we didn't when he asserted that the “war would pay for itself”?
Can we, as investors, find an opportunity here?
Let's get started right when the Iraqi dinar was reborn...
Following the second U.S.-led war in Iraq, the dinar was in a state of limbo.
The old Iraqi dinar, featuring images of Saddam Hussein, had to be completely demonetized and a new batch had to be issued.
The U.S. Dollar (USD) became the de facto currency while the country was virtually rebuilt from scratch. Even to this day, the USD is heavily relied upon by businesses and citizens throughout the economy.
Eventually, banknotes were created in 2003 and the old bills were completely replaced in 2004. These new banknotes led to a cottage industry of sellers sending the new Iraqi dinar to oversea investors who hoped to profit from Iraq's new currency when the economy improved...
The provisional government of Iraq made this legal; the banknotes are exchanged at different rates by companies wanting to turn a profit. Virtually all of the real action has been internal or between central banks through auctions though.
The changing exchange rate comes from booming growth in Iraq and long-term devaluation of the USD...
GDP has grown at a strong pace and is expected to grow at more than 9% per year through 2016. The fiscal deficit is a modest 8% of GDP.
The U.S. Treasury does not officially list the Iraqi dinar as part of the country's Forex reserves. However, the Treasury does say it did an initial currency swap with Iraq to fund their government and ministries.
Exactly how many dinars were traded is never mentioned, but it does make reference to “billions of U.S. dollars” traded to Iraq.
Experts speculate the U.S. government received nearly 4 trillion Iraqi dinars at an exchange rate of 4,000 dinar to 1 USD.
And that would give Bush’s statement — “This is a war that will pay for itself” — some weight.
The Central Bank was expected to withdraw dinars from the market in masses to facilitate the change.
Since then, the plan to change the denominations of dinar bills has been quietly shelved, although it has been slightly changed.
If this ever happens, the new bills with much smaller numbers are tentatively going to be in circulation with the old notes for several years. Gradually the old notes will be phased out as old paper bills are retired.
As we've seen with the back-and-forth currency policies and announcements, the Central Bank of Iraq is still finding its place in what is essentially a brand-new country.
Once monetary policy stabilizes and the dinar is introduced in legitimate Forex exchanges, we'll have a real opportunity on our hands.
What the Iraqi dinar will do (once it is safely and widely traded) is allow you to bet on a country in the Middle East that is seeing strong growth and constantly improving balance sheets..
As long as oil is in high demand — which will undoubtedly be until the world runs out — Iraq will have plenty of money pouring into its borders. Don't forget that Iraq has the potential to boost exports several times over.
With the low fiscal deficit of 8% GDP, Iraq will only be slowed by global economic forces — unlike the United States.