Nigeria's foreign exchange market presented a contradictory picture on Friday as the naira weakened against the US dollar, even as the country's external reserves climbed to nearly $46 billion. This divergence underscores the persistent structural challenges within the FX market, despite gradual improvements in macroeconomic buffers.
Official and Parallel Market Pressures
At the official foreign exchange window, the naira depreciated by 0.21 percent, closing at N1,421.63 per dollar. Intraday trading revealed even more pronounced weakness, with the currency shedding approximately 0.72 percent by the session's end as demand for foreign exchange outstripped available liquidity.
The parallel market mirrored this downward trend, with the naira sliding to around N1,475 per dollar. This movement reflects sustained pressure from importers, businesses, and individuals seeking hard currency outside the official system. Market participants note that the widening gap between demand and supply continues to fuel volatility across all segments of the foreign exchange market.
Factors Driving Depreciation
Analysts attribute the latest depreciation to a combination of foreign exchange payments, cautious investor sentiment, and broader geoeconomic uncertainties. Rising global trade tensions, largely driven by the United States' increasingly protectionist stance, have heightened risk aversion across emerging and frontier markets.
Some market projections warn that the naira could face additional pressure in the coming months, particularly if financial market developments trigger selloffs in naira-denominated assets. Concerns surrounding capital gains taxation and portfolio rebalancing have also featured prominently in investor discussions, limiting near-term inflows.
External Reserves Provide Limited Cushion
In contrast to the currency's performance, Nigeria's external reserves edged higher. Data from the Central Bank of Nigeria indicated that reserves increased by about 0.20 percent to $45.99 billion. This rise was supported by steady oil receipts, stronger non-oil inflows, and the country's trade surplus.
However, financial analysts at Cowry Asset Management noted that while rising reserves offer some degree of support, they may not be sufficient on their own to stabilize the naira. The firm anticipates that the currency will remain under pressure in the near term due to structural FX imbalances and elevated demand, even as reserves continue to show improvement.
Global Market Complexities
Global oil prices added another layer of complexity to the outlook. Crude settled at its highest level in more than a week after fresh US sanctions on vessels transporting Iranian oil and comments by former President Donald Trump about a naval armada heading toward the Middle East heightened geopolitical risks.
Brent crude traded around $64.50 per barrel, while US West Texas Intermediate rose to $59.78, reversing earlier losses linked to easing US–Europe trade tensions. Bonny Light crude, however, slipped 1.21 percent to $67.61 per barrel amid concerns about potential supply disruptions tied to Iran.
Safe-Haven Assets Gain Traction
Beyond oil, gold prices rallied sharply as investors flocked to safe-haven assets. A softer dollar, policy uncertainty, and continued central bank accumulation pushed the precious metal closer to the psychologically important $5,000 level.
Market analysts emphasize that geopolitics remain front and centre in shaping global capital flows. Recent shifts in Venezuela's oil sector and the United States' growing influence over Latin American OPEC supply are also reshaping energy markets, with implications for crude benchmarks and currency dynamics worldwide.
Historical Context and Reforms
It is worth noting that the naira delivered its strongest annual performance in more than a decade in 2025, appreciating by over 7 percent against the US dollar as sweeping foreign exchange reforms by the Central Bank of Nigeria began to reshape market confidence. Recent data from the apex bank showed that the local currency strengthened by 7.4%, or N105.61, to close at N1,435.75 per dollar on the final trading day of 2025, compared with N1,541.36 at the start of the year. This gain marked a sharp turnaround from years of sustained pressure and volatility in the foreign exchange market.
