Abstract

Exchange rate movements can be forecast if we understand how exchange rates are determined. This paper seeks to find significant explanatory variables in the time series variation of foreign exchange rates based on Nigerian data. The study period covered 2004 to 2009 using monthly data for the Wholesale Dutch Auction Market (WDAS). The study embodies the monetary approach to exchange rate determination, and was conducted within the conceptual framework of generalized auto – regressive conditional heteroskedasticity. The result of the analysis showed that the independent variables, foreign exchange demand/supply gap, money supply (broad and narrow), Interest rate, and exchange rate volatility were significant determinants of exchange rate in Nigeria during the period under review. All the included variables were significant, however on the basis of a priori expectations, we observed mixed results with respect to sign of money supply and interest rates.

Key words: Exchange rate volatility, price inflation, market psychology.