The naira eased further against the dollar on the inter-bank market on Wednesday to its weakest level since December 29, 2011 as demand for the dollar outpaced supply.

The naira traded at N163.05 to the dollar, weaker than the N162.56 it closed on Tuesday.

Currency traders said the Central Bank of Nigeria was scheduled to sell $300m at its bi-weekly auction on Wednesday, but there was no sign the regulator would sell additional dollars directly to the inter-bank market to calm the market.

Reuters quoted a dealer as saying, “There is no major dollar flow into the market and the CBN has not intervened in the last four days. The market is short of dollars and the demand keeps mounting.”

The naira has fallen relentlessly in recent weeks, despite CBN’s intervention to prop it up.

The decline in naira was initially driven by dollar demand from fuel importers but later by an exodus of foreign investors out of bonds repatriating their returns.

Dealers noted that higher inflation and signs of currency weakening had scared foreign investors off.

Another dealer was quoted as saying, “Offshore investors had been the major support for the naira in the past, now most of them are selling off their local debt and exiting the market, taking away support for the local currency.”

Foreign exchange reserves hit a 21-month high of $37.64bn by May 28, which could give the CBN some flexibility to defend the naira in the coming days.

The bank still maintains its target band of between 150 and 160 naira to the dollar.

Analysts expect the inter-bank rate for the naira to remain as low as N163 to the dollar for the rest of the year, which could force the bank to re-adjust its target band for the naira to accommodate.

The naira weakened to a four-month low on Monday as foreign investors continued to pull out their money from government bills and bonds due to fears about inflation and currency weakness.

The local unit was traded at N161.25 to the dollar on Monday, as against N160.70 on Friday at the inter-bank market.

Dealers had said weakening the United States job data and the unresolved Eurozone debt crisis had prompted foreign investors to pull money out of riskier frontier markets including Nigeria to safe havens or to switch to cash.

On Monday, the CBN auctioned $300m at N155.80 to the dollar, which was not enough to support the local currency. It sold $250m at N155.75 last Wednesday but did not disclose the amount demanded.

Source: Punch