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Armed with a plastic bag of cash, the Iraqi businessman walked into an estate agency in Baghdad to buy a new house with his savings.

The wads of money that Haider Azzawi handed over provided a striking symbol of the emerging Iraq: they were not US dollars, the currency used for big purchases since the 2003 invasion — the seller did not want them. He wanted local currency, so Mr Azzawi handed over 125 million Iraqi dinar (£51,000).

The exchange is explained partly by the weak dollar, but it also speaks of the renewed confidence in Iraq's future, fuelled by improved security and families who had fled the sectarian violence beginning to return.

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Another indicator comes from Iraqis taking out cash for the annual haj pilgrimage to Mecca, followed by the four-day holiday to celebrate Eid al-Adha, the feast of sacrifice. In the past three years it has led to a rise in demand for dollars. This year the surge has been for dinars.

Mohamed al-Maliki, a professor at Baghdad Economic College, predicted that the dinar would strengthen further. “If the Government can keep the situation stable and support the dinar, then people will trust it and prefer to use it,” he said. “This is the correct attitude. We must use our currency. This will mean we have a strong economy again.”

Mr Azzawi, 30, is one of many Iraqis who have hoarded their savings in dollars since the invasion and are now converting them into dinars as the domestic unit strengthens. This accelerated sharply recently with a rumour that the Iraqi authorities wanted to push the exchange rate down from 1,200 to 1,000 dinars to the dollar. Currency exchange booths around Baghdad were inundated as thousands of Iraqis swapped dollars for dinars.

“We've changed so much money,” said Abu Karar al-Ma'amori, who was dealing with up to 60 customers a day, each with more than $10,000 to exchange. The frenzy eased on Wednesday after the Iraqi Central Bank denied the exchange-rate rumour, but it reiterated that an improved rate for the dinar was part of general policy to end inflation and stabilise the economy.

The dinar, which was relaunched after the war, has risen by about 17 per cent in value against the dollar since September last year. It has failed to boost the purchasing power of Iraqi consumers, however, because shopkeepers who import dollar-purchased items such as cars and refrigerators choose not to reflect the favourable exchange rate in what they charge their customers. Saif Muhammad, a clothes shop owner in Baghdad, said: “I buy all the clothes in dollars and sell them in dinar and I still keep the old prices so I am getting more dollars for the same article.”

The Iraqi money comes in denominations from 50 to 25,000-dinar notes, and $10,000 translates into an enormous mound of cash. Mr Azzawi drove around Baghdad for a week with banknotes stuffed under the driver's seat of his car to exchange $70,000 to buy the four-bedroom house in northeast Baghdad with his brother. “House prices are also going up because security is improving and people are returning to Iraq, so it is a good investment,” he said.

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