Naira Slips as Dollar Continues to Strengthen

The Nigerian naira commenced the week on a bearish trajectory, underlining its continued struggle against the U.S. dollar. This comes as the U.S. dollar index exhibited robust performance in the global market, reflecting a strong dollar against major currencies.

As of Monday, the NGN/USD exchange rate dropped to its lowest level since March, settling at N1,596.6/$ following a decrease in foreign exchange (FX) liquidity at Nigeria’s official market. This marks a 1.66% decline from Friday’s rate of N1,570.14, according to data provided by the FMDQ.

The bearish sentiment was further evident in the decline in transaction volumes, with daily FX market turnover falling by 14.8%, from $120.81 million on Friday to $102.93 million on Monday.

However, on the parallel market, the naira exhibited some resilience, quoted at N1,610/$ on Monday, a slight improvement from N1,615/$ on Friday.

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Since the naira was floated in June last year, the currency has experienced considerable volatility, losing over 45% of its value due to market fluctuations. This recent drop is in spite of U.S. Federal Reserve Chair Jerome Powell’s indication of a potential interest rate cut during the Jackson Hole symposium on August 23, 2024, which had little immediate effect on the naira’s trajectory.

The Central Bank of Nigeria (CBN) has adopted a hawkish stance in its monetary policy, focusing on maintaining price stability and encouraging investments in naira-denominated assets. Nonetheless, the naira’s value remains constrained by underlying fiscal challenges, including underinvestment, suboptimal oil production, and insecurity, despite the benchmark interest rate being raised by 800 basis points to 26.75% within a year.

U.S. Dollar Index Demonstrates Strength

The U.S. Dollar Index regained some ground on Monday, stabilizing around 101 index points after a previous decline. Powell’s dovish remarks at the Jackson Hole Symposium on Friday suggested a potential shift towards looser monetary policy by the Fed. This sentiment contributed to a dip in the 10-year U.S. yield, which fell below 3.8 points, adversely impacting the USD.

Market optimism for aggressive monetary easing may be premature, even as U.S. economic growth exceeds expectations. The dollar index found support at its lowest point since December, indicating a temporary reduction in selling pressure. However, the Relative Strength Index (RSI) remains well below oversold levels, signaling the possibility of further upward corrections.

Citi’s analysis highlights emerging weaknesses in European Union economic data and U.S. factors, such as upcoming elections, which could support a stronger dollar. Historically, September has been a favorable month for the dollar, with positive returns recorded in eight of the last ten years. Investors often gravitate towards the U.S. dollar during periods of heightened risk aversion.

Source: Nairametrics

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