The Iranian rial (IRR) weakened sharply on October 23 as the US dollar posted significant gains amid the looming threat of an all-out war with Israel.

The US dollar climbed 2.77% to close at IRR 686,500 after hitting an intraday high of IRR 687,500, while the regional AED rose 3.5% to IRR 186,300, according to market data.

Other currencies followed a similar trend, with the euro, pound and Canadian dollar also increasing against the rial in the latest downward spiral of the massively weakened Iranian currency. This bout of depreciation comes amid fears in the local Iranian market that Israel could hit several points in the country in the growing war between the two countries.

Payment orders for dollars reached IRR 695,200, up 3.33%, suggesting further pressure on the Iranian currency. The cryptocurrency Tether (USDT) also gained 3.54% to close at IRR 686,500.

Tehran analysts attribute the volatility to broader economic challenges, including inflation and budget deficits, which have pushed investors away from the underperforming stock market towards currency and gold markets.

The PAYA and SATNA interbank payment systems reportedly experienced outages during trading hours, preventing settlement of transactions, according to market participants.

Currency chart access was restricted, with traders reporting that price charting websites had removed dollar rate information.

Fars News Agency said market makers would intervene heavily in both dollar and cryptocurrency markets, predicting a reversal of recent currency gains. However, traders say transactions remain largely frozen.

"Technical issues with payment systems and lack of price transparency have effectively paralyzed trading," said a Tehran-based currency trader who requested anonymity.

"Currency traders are dominating the market due to the struggling stock market," said another Tehran-based analyst who requested anonymity due to market sensitivities.

The currency movements come as traders digest recent comments from President Masoud Pezeshkian on currency reforms and fuel subsidies, while government spokesperson Fatemeh Mohajerani sought to reassure markets about central bank stabilisation efforts.

Separately, Budget Chief Hamid Pourmohammadi announced plans to allocate $12bn in subsidised foreign exchange for essential goods and medicine in next year's budget, aimed at cushioning the impact of sanctions on consumers.

Iran's main equity index tumbled on October 23, with 96% of stocks declining, as the market's total dollar value dropped below $110bn despite rising foreign exchange rates.

The Tehran Stock Exchange's benchmark index fell 1.5% to 1,970,882 points, bringing its weekly losses to 4.59%. The equal-weighted index declined 0.92% to 655,619 points.

The Iran Fara Bourse index also retreated, with its main and equal-weighted measures dropping 0.49% and 0.78%, respectively.

Total market turnover reached IRR 174.14 trillion ($253.7mn), with retail trading accounting for IRR 21.19 trillion. Individual investors withdrew IRR 5.26 trillion from the market.

The market's dollar-denominated value has plunged despite rising free market exchange rates, while the gap between official and market rates has widened to 36% as the official NIMA rate approaches IRR 490,000.