Naira weakens as demand for dollars rises in Nigeria’s FX market
By Sodiq Adelakun
In the unofficial foreign exchange (FX) market, known as the parallel market, the Nigerian naira weakened to N930 to dollar on Thursday.
This decline was driven by the growing demand for dollars, which Nigerian banks were unable to meet.
As a result, buyers turned to the parallel market. However, the Central Bank of Nigeria (CBN) has announced plans to clear the foreign exchange debt within the next two weeks, aiming to restore confidence in the economy.
The inability of Nigerian banks to meet the increasing demand for dollars has led to a surge in the parallel market. Buyers are seeking alternative sources to fulfill their foreign exchange needs, causing the naira to weaken further against the dollar.
The Acting Governor of CBN, Folashodun Adebisi Shonubi has stated that the Central Bank has been discussing strategies to reduce the foreign exchange backlog for some time.
He expressed optimism that the issue would be resolved within the next two weeks, which could help restore confidence in the economy.
Dollar Strength and Safe-Haven Demand:
The dollar remains strong, reaching its highest level since mid-March.
The dollar index and dollar index futures have shown little movement in London trading.
Concerns about global economic conditions have also increased safe-haven demand for the dollar.
The US dollar index, which measures the value of the dollar against a basket of other important currencies, is currently trading at 104.8.
This recent increase in the index means that individuals looking to fulfill foreign exchange payment commitments through dollar transfers to regions like Europe and Japan would require fewer dollars to do so.
Impact on Treasury Rates:
Shorter-maturity treasury rates, which are more sensitive to fluctuations in the Federal Reserve’s rate, have seen an increase.
The two-year yield rose by over 6 basis points to 5.02 per cent before settling around 5.01 per cent on Wednesday.
Data released overnight revealed that the US services sector experienced higher-than-expected growth in August. Additionally, the price index in the sector continued to rise, indicating a positive trend.
The weakening of the naira in Nigeria’s parallel market reflects the growing demand for dollars and the inability of Nigerian banks to meet this demand.
However, the CBN’s plan to clear the foreign exchange debt within the next two weeks is expected to restore confidence in the economy. The strength of the dollar, driven by safe-haven demand and positive US services sector data, has further impacted foreign exchange rates.
