The Naira got stronger against the dollar on Friday. It traded at N1,585/$, which is better than Thursday’s N1,590/$ in the street market.
In the Nigerian Authorized Foreign Exchange Market (NAFEM), the Naira also improved to N1,574 for one dollar on Thursday.
According to FMDQ data, the exchange rate in NAFEM dropped from N1,593.62/$ to N1,574.2/$, showing an improvement of N19.4.
More dollars were traded too, from $142 million on Thursday to $323.11 million—a huge increase of 127.5%. This shows that the Naira was strong enough to keep the dollar from reaching N1,600 this week.
But, for the Naira to go even higher, it needs to break the N1,500 barrier.
Experts say the Naira won’t stay strong unless the government makes good money decisions. Nigeria depends a lot on oil for foreign money, but oil production hasn’t been great. This means Nigeria needs to find other ways to make money and be very careful with its spending.
To help people get foreign money easily, the Central Bank of Nigeria (CBN) started using the Retail Dutch Auction System (RDAS).
This system makes the market more open and fair. It helps everyone know the right price. They also used a two-way quote system to help banks have more money to trade.
Uncleared FX Forward Contracts
Many things are putting pressure on the Naira. People are going on summer vacations, paying for foreign school fees, and needing more dollars for business.
The Central Bank cannot pay $2.44 billion it owes in forex contracts. This is causing big problems for businesses in Nigeria, says the Manufacturers Association of Nigeria (MAN).
In March, CBN said it settled all forex backlog worth $7 billion to calm the market and make investors trust them again. However, they did not settle $2 trillion worth of old contracts, questioning their validity.
MAN disagreed with CBN, saying no company was guilty of breaking rules.
Stronger Dollar Index Affects the Naira
The US dollar got stronger on Friday, making things harder for the Naira. The US economy is still growing, and people thought there would be rate cuts too soon.
Good job numbers on Thursday made people think the Federal Reserve won’t cut interest rates soon. If the Federal Reserve cuts rates in September, it might help the Naira.
Experts are trying to figure out if the US economy will slow down or go into recession. They think the Federal Reserve might reduce rates by 25 basis points in September if inflation stays low.
The US still aims for a 2% inflation target. According to Jeffrey Schmid, Kansas City Fed President, the current policy isn’t too hard.
In the week ending August 2, the number of people claiming unemployment benefits in the US was 233,000; lower than the 240,000 expected.
Higher safe-haven flows and tensions in the Middle East might stop the dollar’s decline. Recently, 40 people in Gaza were killed due to increased airstrikes by Israeli forces. This escalation with Hamas might lead to a bigger conflict as Israel prepares for more trouble.