Due to the US dollar integration into the global economy, its gains are putting more pressure on businesses and governments as they prepare for rising interest rates on their dollar debt, particularly in nations like Nigeria that rely heavily on imports.
This week, all eyes will be on the Federal Reserve, as Chairman Jerome Powell is likely to announce a rate hike as well as new details on the Fed’s $9 trillion balance sheet unwinding plan.
According to Omotoso Oluwaseyi, Forex Analyst at WestbellisyFx, the expected hawkish stance of the US Fed is expected to depreciate the Naira further.
He said, “If there is an increase in the federal funds rate by 50 basis points, raising the target range from the current 25-50 to 75-100 basis point, this implies that an increase in the dollar rate would push the dollar/naira exchange to N600 – N620 per dollar as compared to N580 – N585 it was before.”
The volatility in the foreign exchange market, according to Anwal Usman, a BDC operator in Lagos, is due to a shortage of forex supply, while demand has risen sharply in recent weeks.
He said, “dollar demand has increased significantly, especially since the election is fast approaching, which is why the exchange rate has gone up.”
The dollar rose towards a 20-year high on Monday as the euro struggled around the $1.05 mark. At the time of writing, the dollar index was trading at $103 up 10 per cent within the last 6 months.
The exchange rate at the peer-to-peer forex market was trading at N591.2/$1 down from closing at N565/$1 on December 31, 2021. This is indicative of a N26 depreciation YTD.
Furthermore, if economic activity weakens, developing economies’ currencies may suffer a double blow as demand for risky assets dwindles.
Unfortunately, Nigeria’s trade fundamentals haven’t changed: Nigeria’s capital inflows plummeted to a four-year low of $9.66 billion in 2020, only to drop further to $6.7 billion in 2021.
