Naira Reverses Gains, Depreciates Against Dollar Amid Geopolitical Tensions
The Nigerian naira has experienced a significant depreciation in the official foreign exchange market, reaching its lowest point in two months. This decline comes as rising tensions in the Middle East have triggered increased demand for the US dollar, putting pressure on the local currency.
Recent Exchange Rate Movements
Data from the Central Bank of Nigeria (CBN) indicates that the naira fell to N1,425 per dollar from N1,398 per dollar over the past weekend, marking a depreciation of N27. This latest rate represents the weakest performance for the naira in the last two months, reversing earlier gains seen in February when the currency appreciated to N1,337 per dollar.
In recent weeks, the naira had been on an appreciation trend in the official market since February 17, reaching N1,337 per dollar early last week before beginning a gradual decline to N1,395 last weekend. Cumulatively, the local currency has lost N88 to depreciation over the past three weeks, highlighting the volatility in the forex market.
Parallel Market Performance
The depreciation was not limited to the official market. In the parallel market, the naira also weakened, trading from N1,405 per dollar last Friday. According to Abudullahi, a Bureau de Change (BDC) trader, the dollar was sold at N1,430 and bought at N1,407 on Tuesday, with the pound trading between N1,845 and N1,880 and the euro between N1,600 and N1,630.
Consequently, the margin between the parallel and official markets widened to N15 per dollar from N7 per dollar last weekend, indicating increased disparity and potential market inefficiencies.
Factors Driving Depreciation
An investigation reveals that the naira's recent depreciation, which intensified last week, is largely due to growing demand for dollars from Foreign Portfolio Investors (FPIs) exiting the country. This trend is driven by heightened risk perceptions caused by the ongoing conflict involving the US, Israel, and Iran in the Middle East.
Analysts at Financial Derivatives Company and Cowry Asset Management have confirmed that the decline in the naira is linked to intensified demand for the US dollar amid escalating Middle East tensions. To stabilize the forex market, a source in the banking sector disclosed that the CBN injected $500 million last week to ease pressure from FPI-driven dollar demand.
CBN Releases New Exchange Rates
In response to the market dynamics, the Central Bank of Nigeria has released updated exchange rates for various currencies. The new rates include:
- CFA: N2.45
- Yuan/Renminbi: N201.40
- Danish Krona: N215.75
- Euro: N1,612.14
- Yen: N8.80
- Riyal: N371.10
- South African Rand: N83.69
- Swiss Franc: N1,788.75
- Pounds Sterling: N1,863.06
- US Dollar: N1,393.26
- UAE Dirham: N379.23
Foreign Reserves Show Improvement
Despite the naira's depreciation, there is a positive development in Nigeria's foreign exchange reserves. The reserves have recorded their first increase in five months, providing a boost to the CBN's efforts to support the naira's recovery. This increase is attributed to steady improvements in crude oil production and favorable global oil prices.
In a statement, the CBN reaffirmed its commitment to intervene in the foreign exchange markets to enhance liquidity and alleviate demand pressure on the naira, underscoring its proactive measures to manage currency stability.
