Does the US inflation rate matter to me when saving/investing in USD even though I am in Nigeria?

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Hope you are looking forward to the weekend.

Friday letters are dedicated to taking questions from our community. Do you have a question for us? Please feel free to send an e-mail to [email protected] or a DM to any of our social media channels.

At lunchtime yesterday, we held our first Ask Me Anything (AMA) session on Twitter. For those who could not participate, we bring you answers to some interesting questions asked yesterday.

Question:

Does the US inflation rate matter to me when saving/investing in USD even though I am in Nigeria?

Answer:

It matters a lot, even if you are living in Nigeria. This is because all currencies lose value over time, although this happens at an uneven pace. For instance, long-term inflation in Nigeria is around 12%, but 2% in the US. What this means is that prices will double in 6 years in naira, while it will take 35 years for it to double in US dollars. 

For you as an investor, you want the buying power of your money to remain strong regardless of the currency you are investing in. The implication is for you to demand a return above inflation in all currencies you are investing in.

Question:

What are the dollar saving/investment options available?

For savings options, you can save in dollars by opening a domiciliary account with a commercial bank. However, this will not yield anything because it is in a current account. This is because of the high liquidity, which means you can withdraw anytime you want. The fixed deposit option could pay up to 2% interest rate depending on the bank. 

Another savings option is through the dollar savings that requires a lock-up period. This is available on channels such as Piggyvest Flex and they offer up to 7% per annum in return. The return is higher than what you will get from banks.

For investments, a dollar mutual fund or a Eurobond fund is an option. The return here is not fixed but historical returns are in the high single-digits of around 7–8%. It could potentially be more or less depending on market conditions. Platforms like Cowrywise are good for this because the minimum investment amount required is low compared to investing directly with asset management institutions. 

Question:

To what extent does the exchange rate matter when saving/investing in dollars?

In the short-term (under a year), it matters because the exchange rate can move against your position. If you have money that you know you will need in the short-term, it is better to be careful about buying dollars because the naira has the potential to gain in value. 

For long-term investment purposes, you don’t need to worry. You can always do your dollar investments without worrying about the current exchange rate because it will always pay off in the future.

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