Naira struggles to maintain stability amidst global challenges
By Sodiq Adelakun
The naira is facing significant challenges as it once again surpasses a crucial resistance level on the black market, settling at N1,170 against the US dollar.
This comes at a time when the US Federal Reserve is set to announce its interest rate decision, adding further uncertainty to the Nigerian currency’s stability.
Despite favorable conditions in the global oil market, Nigeria has failed to capitalize on this opportunity to support its local currency.
The country’s economy has been adversely affected by geopolitical instability in Eastern Europe since February 2022, resulting in a lack of dollar liquidity in the central bank’s vaults.
In response to the currency’s struggles, the Central Bank of Nigeria (CBN) has taken unorthodox measures to bolster the naira in the foreign exchange market.
Currency traders are now re-evaluating their strategies following reports that the Nigerian government plans to digitize forex transactions and discourage speculative demand and cash hoarding.
Despite efforts to support the naira, sources of foreign exchange (FX) liquidity remain largely elusive. Nigeria heavily relies on revenue from oil sales as its primary source of dollar inflow.
However, the country’s oil production has been declining month by month, falling short of OPEC’s daily quota of 1.8 million barrels per day. This decline in production, coupled with rising oil prices, has further strained Nigeria’s ability to maintain a stable currency.
Additionally, recent geopolitical developments, including conflict in the Middle East and the ongoing conflict between Russia and Ukraine in Eastern Europe, have increased demand for the dollar.
Market speculators believe demand for the US dollar will skyrocket as investors seek refuge in safe-haven currencies during this period of increased uncertainty.
For the second meeting in a row, the Fed is most likely to maintain its policy rate at 5.25%.
The language in the statement about the likelihood of further tightening as well as Chairman Powell’s remarks about the policy outlook could increase volatility later today US Fed Chairman Powell, while earlier acknowledging the recent tightening of financial conditions in the world’s largest economy, left open the possibility of raising interest rates.
The US dollar has continued to strengthen against other major currencies, with market analysts citing a number of factors contributing to its rise.
These include the recent trade tensions between the US and China, which have led investors to seek out the safety of the dollar.
In addition, geopolitical uncertainty in the Middle East and Eastern Europe has also boosted demand for the currency.
The Federal Reserve is expected to maintain its policy rate at 5.25% for the second consecutive meeting, although any remarks by Chairman Powell about the policy outlook could increase volatility.
However, some analysts suggest that the dollar’s rally may be reaching its peak, and that a reversal could occur if the US economy begins to underperform.
