Exchange rate fluctuations and the total stock market index are among the most important factors of financial instability in the Iranian economy. Understanding the relationship between these two variables can help policymakers and capital market activists in decision-making. This study examines the Granger causal relationship between the nominal effective exchange rate and the total index of the Tehran Stock Exchange using daily data from 2008 to 2024. After unit root tests and determining the optimal lag, the VAR model is estimated and the Toda–Yamamoto test is used to examine the causality between the variables. The results show that both variables are non-stationary at the level and stationary in the first difference. Based on the model coefficients and the causality test, there is a two-way relationship between the exchange rate and the stock index; however, exchange rate shocks have a stronger effect on the stock index and play a more leading role in the country's financial dynamics. This is consistent with the export-oriented structure of large listed firms and the effect of inflation expectations on cash flow. The findings highlight the need to coordinate monetary and fiscal policies and develop currency risk management tools.