Naira exposed to market forces, Loses N1,650/$ level at official market

The local currency has been left to the whims of market forces amid the strengthening of the U.S. dollar index.

The Naira’s decline against the US dollar persisted in the official foreign currency market.

At the official window, the local currency was at N1,654.09/$1 on Wednesday, based on data from the Nigerian Autonomous Foreign Exchange Market.

This meant that yesterday’s official window price of N1,654.09/$1 was N1.07 higher than the previous day’s price of N1,653.02/$1.

The Naira has experienced a parabolic decline this year despite improved FX holdings held by the CBN. Nigeria’s foreign reserves increased from $38.4 billion in September 2024 to $40.2 billion in October 2024. Olayemi Cardoso, the CBN chief, mentioned this at an investors’ gathering in Washington, DC.

Nigeria’s Minister of Finance and Coordinating Minister of the Economy, Wale Edun, was also present at the meeting and affirmed the federal government’s choice to forgo defending the Naira, allowing the country’s gross reserves to grow organically. Edun clarified that the increase in gross reserves is due to the Central Bank of Nigeria’s (CBN) decision to let the market determine the Naira’s exchange rate rather than preserving it artificially.

“The key reason the gross reserves are growing organically is that we aren’t defending the Naira as we formerly did,” he stated. He emphasized the enormous expense of previous measures aimed at supporting the currency, pointing out that it costs a billion dollars every month just to protect the Naira. He asserts that the government aims to increase the foreign exchange supply without significant central bank intervention. Although the CBN may occasionally intervene in the market, he admitted that the goal is to achieve a stable exchange rate independent of central bank actions.

U.S. Dollar Index Nears Highest Level Since July 30

The safe-haven currency is set to post its 16th victory in 18 sessions and its fourth consecutive week of gains as positive economic data reduced expectations regarding the extent and speed of rate cuts by the Federal Reserve, driving up U.S. Treasury rates. The yield on benchmark U.S. 10-year notes rose 3.4 basis points (bps) to 4.24%, up from a three-month high of 4.26%. After declining for five consecutive months, the yield on the 10-year is up about 40 basis points in October.

The dollar index, which measures the value of the U.S. dollar relative to a basket of six major currencies, rose by over 30 basis points to 104.43 after hitting its highest level since July 30 at 104.57 index points. According to the central bank’s “Beige Book,” released on Wednesday, economic activity was only slightly changed from September through early October, but firms reported an increase in hiring. This aligns with recent trends reinforcing expectations that the Fed will decide on a smaller 25-basis point cut at its November meeting.

Markets are pricing in an 88.9% chance of a 25-basis point rate cut at the Fed’s November meeting, while the likelihood of the central bank holding rates constant stands at 11.1%, according to CME’s FedWatch Tool. A month prior, the market had fully priced in a drop of at least 25 basis points, with a 50-basis point cut deemed 53% likely.

The much-anticipated U.S. presidential election is also affecting currency fluctuations. Market expectations have recently risen for former President Donald Trump, the Republican presidential nominee, to win, which could likely lead to inflationary policies, such as tariffs.