There are strongindications thatthe Central Bank of Nigeria (CBN) would continue to defend the naira against other world currencies, particularly the United States dollar, to maintain its trading band and check volatility in the foreign exchange market.Dealers at the interbank market segment said the naira closed stronger last Friday because of increased dollar supply from direct CBN sales and sales by oil firm, Shell to some banks.They said the market closed early to enable banks prepare their books for the year end, but increased dollar supply provided support for the naira and signalled hope the apex bank may be willing to defend the naira in the new year.'The central bank direct dollar sale to some banks at the last minute is seen as a signal of its intention to defend the naira within its trading band in the coming year,' one dealer said.The central bank moved its target trading band for the naira on November 28 to +/-3 percent around N155, from +/-3 percent around 150, owing to prolonged naira weakness and high dollar demand.At one point in the year the naira weakened to as low as N168 to the dollar on the interbank market, as some importers brought forward their obligations to hedge against future depreciation of the currency. The International Monetary Fund (IMF) said the currency is overvalued in February and sought greater flexibility in the exchange rate management, spooking the markets.'The market decided to price in the IMF concerns on the naira, especially seeing that foreign reserves are consistently declining despite the huge revenue accruing from rising oil prices,' one trader said.Dealers said the naira decline was further aided by the frequent inability of the CBN to meet all demand at its bi-weekly auction subsequently, fuelling speculation the regulator might have to revalue its target rate.In moves to prop up the naira, the central bank hiked its bench-mark interest rate six times and excluded some oil importers and airline operators from buying dollars from its bi-weekly forex auction to reduce demand pressure.'None of the central bank measures to curb demand for the (dollar) effectively addressed the supply gap in the market. The point is that there was latent demand from importers, especially fuel dealers, so the naira simply fell under such pressure,' a currency dealer told Reuters.Traders said an early signal for the naira outlook in the new year will be the ability of the central bank to meet all dollar demand at its first auction on January 4, when the official foreign exchange market is expected to reopen.Meanwhile, the naira closed for the year at a five week high on Friday, but it was 4.46 per cent down on its opening level at the start of 2011, as months of dollar demand pressure took its toll on the local currency, traders said.The naira closed at N159.10 to the dollar on Friday, its strongest since November 25, traders said, up from N163.15 to the dollar at Thursday's close.But that was down 4.46 percent on the N152 to the dollar on which it opened the year.
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