The Nigeria naira firmed sharply against the greenback on Wednesday after the central bank pumped dollars into the market and cleared all forex demand at its bi-weekly auction, signalling its determination to support the local currency.

The central bank sold all the $591.67 million demanded at 150 naira to the U.S. dollar at the auction, a rate not seen since July, compared to $400 million sold at 156.91 naira at its previous auction on Monday.

The central bank also intervened in the interbank market on Tuesday, selling $200 million at 153 naira to the dollar to some lenders in sub-Saharan Africa's second biggest economy, tempering demand at the auction, dealers told Reuters.

Central bank officials were not immediately available for comment.

The central bank needs to show it can sustain the support for the naira by meeting demand at subsequent auctions, in view of the declining foreign reserves, one dealer said.

The naira closed at 157.10 against the greenback at the interbank, firming from Tuesday's close of 158.90 and up 6 percent from the record low of 167.8 reached before the central bank imposed several monetary tightening measures at an emergency meeting on Monday.

The naira traded around 153.30 shortly after results of the auction were announced but remains volatile.

The naira's decline steepened this month after the central bank broke its rule of only selling dollars in the 145.5-154.5 range at its bi-weekly currency auctions -- a system designed to stabilise forex trading.

After selling dollars outside the weakest boundary at three auctions running it returned within the channel on Wednesday as the regulator looked to capitalise on this week's measures.

RATE HIKE

The central bank hiked its benchmark interest rate by 275 basis points to 12 percent on Monday, far higher than analysts expected. But the regulator's bold actions to support the naira have a cost.

Nigeria's foreign reserves stood at $30.86 billion at October 7, declining to multi-year lows, without reflecting dollars sold this week. It stood at $34.84 billion a year ago.

Central bank governor Lamido Sanusi said on Monday raising interest rates and tightening other areas of monetary policy would soon result in higher forex reserves. But for now the trend continues to be declining reserves, despite high oil prices and production.

Currency dealers attribute recent declines in the nation's foreign reserves to the surge in dollar demand at the central bank's bi-weekly auctions.

State-owned energy firm NNPC is expected to sell around $700 million to some lenders this week, further strengthen the local currency at the interbank, dealer say.

The central bank has in the past attributed elevated dollar demand at its auction to speculation and recently limited the net open interest of banks to 1 percent from 5 percent as part of moves to curb demand and support the naira.

Analysts have criticised the new open limit restriction, arguing that it could almost shut down the interbank market, with banks unable to take position in the dollars.

(dollar) demand still remains high which could constrain the ability of the central bank to continuously fill the market, especially as reserves declined to a multi-year low of $30.9 bln on 7 Oct, said Samir Gadio, Standard Bank's emerging markets strategist.

The loose fiscal stance, combined with the possibility of lower oil prices in 2012, will also pose a threat to the U.S.dollar/naira outlook, he said.