The naira could come under fresh pressure after the United States Federal Reserve raised its interest rate, as investors may become more interested in dollar assets that offer higher returns.
The US central bank raised its benchmark interest rate by 0.25 percentage points to a range of 3.75 per cent to four per cent on Wednesday. It was the first rate increase by the Federal Reserve since 2023.
The decision could affect countries like Nigeria because higher interest rates in the US can make investments such as US government bonds more attractive to foreign investors. Some investors may therefore reduce their investments in emerging markets and move part of their funds into dollar assets.
For Nigeria, this could increase demand for the dollar and put more pressure on the naira if foreign investors reduce their holdings of naira-denominated assets. A weaker naira could also increase the cost of imported goods and services, as many international transactions are carried out in dollars.
Businesses that depend on imported raw materials, machinery and other products could face higher costs if the dollar becomes more expensive. Companies with dollar loans could also need more naira to repay their debts, which could add to their operating costs.
However, the effect of the US rate hike on the naira will depend on several factors, including Nigeria’s foreign exchange supply, oil earnings, foreign reserves, interest rates and investor confidence. Strong dollar inflows from crude oil sales, remittances and foreign investment could help reduce some of the pressure.
The difference between interest rates in Nigeria and the US will also be important. Nigerian investments may continue to attract investors if they offer higher returns, but investors will also consider the risk of a fall in the naira. A high return on a naira investment could lose value when converted back to dollars if the naira weakens sharply.
The latest decision by the Federal Reserve therefore adds another challenge for Nigeria’s foreign exchange market. While the US rate hike does not automatically mean the naira will fall, it could make dollar assets more attractive and make it harder for emerging markets like Nigeria to attract foreign investors.