The Nigerian Naira has experienced a decline against the US Dollar on the parallel market due to a surge in demand within the informal sector.
This situation has caused a widening gap between the parallel market and the official market, where currency trading is restricted.
Despite this, it’s worth noting that this trend doesn’t completely align with the performance of the US Dollar index this year.
Unusual Dynamics and Expert Insights
Specifically, the Naira weakened to an exchange rate of N910 per Dollar in the parallel market on Wednesday, August 9, 2023.
This drop was exacerbated by the inability of Nigerian banks to meet the rising demand for dollars, prompting buyers to turn to the parallel market.
Additionally, the Naira is under pressure as many middle and high-income individuals are using the US Dollar as a means of preserving value.
Interestingly, recent movements in the US Dollar index chart show a disconnect with the Naira’s performance.
The US Dollar lacked a clear long-term trend and is presently consolidating within a range. Conversely, the Naira has lost more than 50% of its value in 9 weeks.
The US Dollar index has generally been trading at a yearly low, especially against key currencies like the Euro, Japanese Yen, Swedish Krona, Canadian Dollar, and British Pound.
Olawale Edun, a potential future finance minister of Nigeria, has supported the narrative presented by the chart.
He stated that the prevailing exchange rates in the black market are not in line with economic fundamentals. According to him, a more suitable Naira-to-Dollar exchange rate would be around 700.
US Inflation’s Influence
Currently, foreign exchange traders are closely monitoring US inflation data, which is expected to show a 4.8% year-on-year growth in core US consumer prices for July.
Although the annual rate had been declining over the past months, it’s projected to rebound from 3.0% in the previous month to 3.3%. However, the monthly increase is anticipated to remain at 0.2%.
Any significant deviation from these figures could impact the US Dollar and the global foreign exchange market.
The release of US inflation data might signal a shift in the Federal Reserve’s monetary tightening strategy, potentially leading to a short-term weakening of the US Dollar.
Hopes that the latest US Consumer Price Index (CPI) release could support the conclusion of the Fed’s tightening cycle are contributing to early trading weakness in the US Dollar on Thursday.
The US Dollar Index is still trading below 102.50 in the negative territory, following minor losses on Wednesday.
The economic agenda in the US will also feature the weekly Initial Jobless Claims report, along with speeches from several Federal Reserve policymakers.
Dollar’s Resilience and Global Impact
A research report from JP Morgan confirms that the US Dollar could maintain its recent upward trend due to favourable seasonal patterns, remaining unaffected by recent debt downgrades from rating agencies in the United States.
This positive outlook for the Dollar is bolstered by a favourable macroeconomic environment, including increasing interest rates and solid economic performance in the US.
JP Morgan analysts remarked,
- “In our view, the near-term macro backdrop is more important and should support the dollar.” Despite some defensive stances in recent weeks, driven by resilient US data and a notable decline in data from Europe and China, the US Dollar seems to have gained strength in an environment where it yields 5%, and the central bank balance of the G4 countries is shrinking rapidly.”
