October 28, 2024 — The Nigerian naira continues to face downward pressure against the US dollar, trading at N1,654.09 per dollar in the official foreign currency market as of Wednesday. This marks a slight increase of N1.07 from the previous day’s rate of N1,653.02.
Despite a recent boost in Nigeria’s foreign reserves—from $38.4 billion in September to $40.2 billion in October—the naira’s value has been in decline throughout the year. Olayemi Cardoso, Governor of the Central Bank of Nigeria (CBN), acknowledged this trend during an investors’ gathering in Washington, DC.
Policy Shift: Allowing Market Forces to Determine Exchange Rate
Wale Edun, Nigeria’s Minister of Finance and Coordinating Minister of the Economy, stated that the federal government has chosen not to defend the naira, allowing market dynamics to dictate its value. He emphasized that this approach has led to organic growth in gross reserves, reducing the need for expensive interventions that previously cost the government approximately $1 billion monthly.
Edun clarified that the strategy aims to increase the supply of foreign exchange without heavy reliance on central bank intervention. Although the CBN may intervene sporadically, the long-term goal is to achieve a stable exchange rate through market mechanisms.
US Dollar Strengthening Influences Naira Performance
The recent strength of the US dollar, reflected in the Dollar Index reaching its highest level since July 30, has further complicated the naira’s position. The index increased by over 30 basis points to 104.43, driven by positive economic data that reduced expectations of aggressive rate cuts by the Federal Reserve. The yield on benchmark US 10-year notes has also risen, reflecting heightened investor confidence.
Market Expectations and Future Outlook
Markets are currently pricing in an 88.9% chance of a 25-basis point rate cut by the Federal Reserve in its upcoming November meeting. This contrasts with a month ago when the likelihood of a larger cut was higher. Additionally, ongoing political developments, including expectations around the upcoming U.S. presidential election, are likely to affect currency fluctuations, particularly if former President Donald Trump’s candidacy influences inflationary policies.
As the naira grapples with these economic pressures, analysts will be closely monitoring both domestic policy decisions and global market trends to assess the currency’s future trajectory.
