Currencies are like commodities; if you need a foreign currency, you must exchange a certain amount of your local currency for obtaining the foreign currency you need. The rate at which your local currency is traded for such foreign currency is known as the currency exchange rate. The currency exchange rate is essential in finance, investment and international economics.
Just like other financial assets, foreign currencies are traded on the forex market (foreign market) in pairs. You can sell a pair or combination of currencies like GBP/USD(pounds/dollar), AUD/CAD(Australian dollar/ Canadian dollar), EUR/NAR( euro/naira)etc.
Do you know how much Naira you need to buy one Euro unit? How about 350 units of Euros? This is what the exchange rate does for you.
Euro is a popular European currency, and Nigeria is a good trade partner to many European nations. Since most Nigerians engage in trades in Europe which will require them to pay in euros, they need to convert the Naira to euros.
In this article, we will discuss the history of the Euro and Naira, how the exchange is calculated, factors affecting exchange rates and some currency conversion tools you can use to determine the exchange rate at any time.
Understanding the Euro
The Euro is the most common European currency used across Europe. The European Union treaty masterminded it after being adopted by twelve countries in 1999. However, it was only introduced as a non-monetary unit in 1999. It began circulating in member nations as legal tender in 2002, which led them to revoke their respective legal tender and accept the Euro as their legal tender.
The first twelve countries of the European Union that first adopted the Euro were the UK, France, Germany, Italy, Belgium, Ireland, Denmark, Netherlands, Portugal, Greece, Luxembourg and Spain.
Some other countries joined the European Union and adopted the Euro in subsequent years till 2023.
About twenty countries out of the twenty-seven member nations use the Euro.
The one currency(Euro) was perceived as a tool to obtain and retain political, economic, social and cultural power and coalition in Europe and the world. This was made possible by the relaxed policies governing the EU member nations.
The Euro has no standard exchange rate with other currencies. The exchange rate fluctuates due to factors affecting currency exchange rates, such as; Inflation, interest rates, the balance of payments, political factors and global factors.
Understanding the Nigerian Naira
The Naira is the official currency of Nigeria, a country in West Africa. Before Nigeria became an independent and sovereign nation in 1960, the pound sterling, the British colonial currency, was the official currency until 1973.
A government bank was established for the regulation, issuance and management of the Naira in 1958, long before the Naira began to circulate. This bank is known as the Central Bank of Nigeria and has branches all over the states of Nigeria today.
The CBN introduced the Naira in 1973 as the official currency and pegged it at a ₦2 to £1 exchange rate.
Since 1973 till date, the CBN has introduced new denominations of the Naira.
The ₦20 was introduced on 11th February 1977, while on 2nd July 1979, new currency banknotes of three denominations, namely ₦1, ₦5 and ₦10, were introduced.
The ₦ 50 was introduced in 1991, and in a bid to enable a more efficient system which would increase economic activities, the ₦100, ₦200, ₦500 and ₦1000 notes were introduced in December 1999, November 2000, April 2001 and October 2005 respectively.
The Naira exchange rate with other currencies occasionally fluctuates due to the factors governing exchange rates.
Having a specific exchange rate of naira pairs is difficult because the CBN does not regulate the Naira in a fixed exchange regime; instead, it operates a combination of fixed and floating exchange regimes.
Some factors that can affect the naira exchange rate with other countries currencies include; inflation, the balance of trade, political factors, monetary policies, and regional crises.
Exchange Rate Calculation
Now you have understood that the exchange rate is usually determined by some factors listed above, which makes it possible for the exchange rate of one currency pair to vary over time and spontaneously.
You may have asked yourself, “how do I calculate the exchange rate of two currencies?”
First, you should check the price of the pair in the foreign exchange market using some forex brokers.
For example, if the pair says EUR/USD is 1.65. This means you’ll need $1.65 to purchase one unit of euros. In essence, for every Euro you want to buy with dollars, you will pay $1.65.
If you want to know how much you will get for one dollar with one Euro, take the inverse of the price using the formulae 1/1.65. This will give you 0.606060.
According to some currency conversion tools, the current exchange rate of 350 euros in Nigerian Naira is ₦172,255.61 at 492.159.
You can check the live currency exchange rates with conversion tools like xe.com, bankrate.com, oanda.com etc.
Factors Affecting Currency Exchange Rates
Many factors can affect a country’s currency exchange rates. These factors are mainly economic, monetary, political and global.
The economic factors that may affect the currency exchange rate include inflation, recession, the GDP, balance of trade(net import and export) etc. Low GDP and high imports to exports will also negatively impact the exchange rate and vice versa. In times of high inflation and recession, the currency will perform poorly in the forex market.
The primary monetary policy that affects the exchange rate is the interest rate. With high-interest rates, foreign lenders will be attracted, as well as foreign capital, which will strengthen the currency in the forex market.
Harsh political decisions and political unrest scare away foreign investors and slow down economic activity, which will lead to low productivity and further lead to low exports. The exchange rate will invariably be affected terribly as a result of this.
Global factors such as natural disasters, wars and pandemics also affect currency exchange rates.
Conclusion
In summary, the exchange rate of 350 euros in Nigerian Naira is not fixed. The factors highlighted in this article mainly determine how high or low a country’s exchange rates will be with another currency.
The exchange rate margin between the Euro and the Naira is quite broad. This can be traced to the low productivity, GDP, high inflation rate, recession and other political crises troubling Nigeria.
