Economic stability is considered one of the fundamental prerequisites for sustainable economic growth, and exchange rate fluctuations, being one of the most  significant macroeconomic variables, play a decisive role in either strengthening or undermining this stability. The main objective of this study is to evaluate the financial stability of Iran's economy by focusing on a dynamic analysis of the foreign exchange market over the past two decades. Using a system dynamics approach and Vensim software, the model is developed based on two decades of empirical data and simulated for the next 20 years. Causal and feedback relationships between the exchange rate and key macroeconomic variables are modeled to capture the dynamic interactions within the system. Simulation results indicate that sharp exchange rate fluctuations during periods of crisis have significantly undermined investor confidence, banking indicators, and financial balances, thereby intensifying financial instability. The findings reveal that fixed exchange rate policies or abrupt rate hikes are among the least effective approaches, while gradual and economically-aligned increases have comparatively lower negative impacts on macroeconomic indicators. In fact, a managed floating exchange rate regime is identified as a key factor in promoting financial stability. The study underscores the necessity of structural reforms in Iran’s monetary and exchange rate systems to mitigate currency shocks and enhance long-term economic resilience.