February 6, 2017 / 12:22 PM / 6 months ago

UPDATE 1-Nigeria's naira falls to record low of 500 on black market, traders say

(Adds quote, FX reserve, background)

By Chijioke Ohuocha and Oludare Mayowa

LAGOS, Feb 6 (Reuters) - The naira dropped to a record low of 500 to the dollar on the black market on Monday, even though Nigeria's foreign reserves rose to their highest in a year, as demand for the U.S. currency grew and the central bank rationed dollar supply, traders said.

The naira has been hovering near the 500 level for the past two weeks. On the official market, it has been quoted at 305.25, where it has been trading since last August.

Last week the central bank sold $660 million in three- and five- month currency forwards at an auction aimed at clearing a backlog of dollar demand. But traders say that was not enough to satisfy the market.

On Monday, central bank data showed its foreign exchange reserves have been rising, though they remain far from their peak of $64 billion in August 2008. The reserves had climbed to a one-year high of $28.28 billion by Feb. 2.

"Despite rising FX reserves, it's the amount of FX that is supplied that matters. The parallel market, by its nature, is particularly sensitive to demand-supply imbalances, and has a tendency to overshoot," said Razia Khan, head of Africa research at Standard Chartered Bank.

"Supply of FX matters more than any other factor."

Traders say the central bank has been selling dollars on the official market to support the naira, but dollar shortages were causing the Nigerian currency to weaken on the black market.

The government has been pressing retail currency operators to narrow what it says is a damaging gulf between the naira's official rate and the unapproved open retail market.

The naira lost a third of its official value against the dollar in 2016 after the central bank scrapped its peg for the currency, allowing the naira to float on the interbank market, in a bid to alleviate dollar shortages. (Editing by Larry King)

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