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|Simple Reason Why The Naira Depreciates Against The Dollar by JAkpayen(m): 4:47pm On Feb 09, 2016|
The price of commodity (mostly denominated in USD) has fallen so much from Mid-2015. Because of this, many countries that imports commodities from the US have bought massively including Nigeria, thus the inflow of dollars into the US economy.
Therefore there is high demand for dollar to buy low-price commodities before they will shoot up. This means that people who imports from the US are seeking to buy the scarce dollar. In economics, a limited supply of a good, coupled with a high demand for that good, results in a mismatch between the desired supply and demand equilibrium. In pricing theory, the scarcity principle suggests that the price for a scarce good should rise until an equilibrium is reached between supply and demand.
What can the government do when such situation arises? The best policy is to diversify the foreign exchange reserves to other major reserve currencies and keep the interest rate as low as possible because this will help bring inflation down or at a sustainable growth.
Market speculation is high and predicts that soon commodity prices will rise significantly.
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