Naira Suffers Setback in Foreign Exchange Market Amid Dollar Demand Surge
The Nigerian naira experienced a decline on Thursday, marking an end to its three-day appreciation streak in the country's foreign exchange market. The local currency weakened by 0.57 percent against the US dollar at the Nigerian Foreign Exchange Market (NFEM), reflecting renewed pressure from heightened dollar demand that outpaced available supply.
Market Dynamics and Trading Patterns
Market data revealed that the naira traded within a narrow intraday band of ₦1,361.80 to ₦1,370.00 per US dollar before ultimately closing at ₦1,366.06. This pullback follows recent gains that had temporarily eased concerns about currency stability and narrowed the gap between official and parallel market exchange rates.
Financial analysts attribute this latest depreciation to several key factors:
- Increased dollar demand at the official window
- Profit-taking activities by foreign portfolio investors
- Limited dollar supply against building demand
According to market insights from AIICO Capital Limited, demand for US dollars accumulated rapidly against constrained supply, creating significant pressure on the spot rate. Foreign portfolio flows have demonstrated particular sensitivity to short-term movements in the naira, with investors capitalizing on gains following the currency's recent appreciation.
External Reserves Show Modest Improvement
Despite the naira's retreat, Nigeria's gross external reserves recorded a positive development, increasing by $106.24 million day-on-day to reach $46.81 billion. Data from the Central Bank of Nigeria indicates this modest uptick provides some buffer for monetary authorities as they continue efforts to stabilize the currency and meet foreign exchange obligations.
However, financial experts caution that reserve accretion remains vulnerable to developments in global commodity markets, particularly crude oil, which serves as Nigeria's primary foreign exchange earner.
Global Commodity Market Influences
Global oil prices faced downward pressure on Thursday, declining by more than 3 percent amid easing geopolitical tensions. This development followed reports that the United States and Iran agreed to hold talks in Oman, raising expectations of fewer disruptions to Iranian crude supply.
Key commodity movements included:
- Brent crude dropped 2.42 percent, or $1.68, to trade around $67.78 per barrel
- US West Texas Intermediate fell 2.39 percent to approximately $63.58 per barrel
- Gold prices retreated as a stronger US dollar reduced the appeal of the non-yielding asset
Spot gold declined by 185 basis points to $4,871.63 per ounce, while US gold futures fell by 121 basis points to about $4,890.95 per ounce. Softer oil prices could potentially weigh on Nigeria's export earnings if this trend persists in the coming weeks.
Market Outlook and Economic Implications
Analysts anticipate oil prices will remain under pressure in the near term as markets closely monitor the outcome of US-Iran discussions for signals of reduced geopolitical risk. Gold may continue to face headwinds from sustained dollar strength and weaker safe-haven demand.
For Nigeria's economy, the combination of fluctuating oil prices, volatile portfolio flows, and rising dollar demand suggests continued pressure on the naira, even as external reserves offer short-term support. This situation may lead to increased costs for importers and businesses relying on foreign exchange for their operations.
The Central Bank of Nigeria has recently updated the exchange rate for customs duty calculations at Nigeria's air and seaports, reflecting the naira's sustained appreciation against the US dollar in previous weeks. This adjustment is expected to help ease cost pressures for importers who have been navigating the volatile foreign exchange environment.
