The dollar remained stable near its six-month highs due to persistent signs of inflation in the United States, fueling concerns about the Federal Reserve’s hawkish stance.
In the unofficial foreign exchange (F.X.) market, also known as the parallel market, the Naira depreciated to N930 per dollar on Thursday.
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This decline was exacerbated by Nigerian banks’ inability to meet the increasing demand for dollars, leading buyers to turn to the parallel market.
The Central Bank of Nigeria Intension Towards the Foreign Exchange Debt
The Central Bank of Nigeria (CBN) intends to clear the foreign exchange debt within two weeks, which should help restore economic confidence.
Folashodun Adebisi Shonubi, the acting governor of CBN, stated on Monday that discussions about reducing the foreign exchange backlog have been ongoing, and they hope to achieve this goal in the coming two weeks.
The dollar remains at its highest level since mid-March, with minimal fluctuations observed in the dollar index and dollar index futures during trading in London.
Growing concerns about deteriorating global economic conditions have additionally heightened the demand for the dollar as a safe-haven asset.
The Index Gauges the Dollar’s Value
As of the current moment, the U.S. dollar index is trading at 104.8.
This index gauges the dollar’s value compared to other significant currencies, including the Euro, British pound sterling, Swedish krona, and Japanese yen.
The recent gains in the index imply that individuals seeking to fulfill foreign exchange payment obligations by transferring dollars to regions such as Europe and Japan would need to provide fewer dollars for the same transactions.
Treasury rates for shorter maturities, more sensitive to changes in the Federal Reserve’s interest rates, experienced a modest increase of several basis points on Wednesday.
After rising by more than six basis points to reach 5.02%, the two-year yield settled around 5.01%.
U.S. Services Sector Saw a More Substantial Increase Than Anticipated
Overnight data revealed that the U.S. services sector saw a more substantial increase than anticipated in August, with the price index continuing to climb.
These figures have raised concerns about persistent short-term inflation, prompting the Federal Reserve to maintain its hawkish stance.
Throughout the week, a series of Federal Reserve officials are expected to make statements, providing further insights into monetary policy ahead of the upcoming rate decision at the end of the month.
While the Federal Reserve is widely expected to keep interest rates unchanged, it is also likely to reiterate its commitment to sustainable rate hikes.
The robust U.S. labor market provides the U.S. Federal Reserve with more tools to combat inflation, intensifying the pressure on currencies of emerging markets like the Nigerian Naira, as investors increasingly seek refuge in safe-haven currencies.
The U.S. dollar remains central to the global financial system, and U.S. Treasuries remain the preferred safe haven. In the SWIFT payment system, over 40% of transactions are conducted in dollars, solidifying its dominant position.
The euro accounts for approximately 25% of transactions, while the yuan represents around 3%. However, the dollar’s share of foreign exchange reserves reached a record 58% in early 2023, though it was 73% in 2001.
Despite ongoing shifts, deeply ingrained habits are unlikely to fade quickly. According to a recent report by JPMorgan economists, while some gradual de-dollarization is occurring, it takes time to process.
Despite its imperfections, the dollar is deeply entrenched in global transactions, making a rapid transition to another currency highly impractical.
