Rand plunges to fresh six-month lows as US Fed takes centre stage

The rand dipped to a fresh six-month low on Wednesday morning, signalling that investors expect the US Federal Reserve to increase interest rates faster than expected.

This had the dollar riding roughshod over other currencies, pushing the rand to lows of nearly R13.40/$, its weakest point since mid-December 2017.

The weaker rand fuels inflation but is a boon to exporters.

The strong dollar followed a pick-up in US inflation figures for May, backing a case for more rate increases.

The US Fed is widely expected to increase rates by 25 basis points when it concludes its policy meeting on Wednesday night.

“Given the jump in the May inflation print, the question now is whether the Fed will pencil in a December hike or not. If they do, expect the US dollar to surge and emerging markets to be smacked,” said Rand Merchant Bank analysts Isaah Mhlanga and Elena Ilkova.

US inflation accelerated to an annual rate of 2.8% in May, its highest since early 2012, from 2.5% in April. The Fed has a target of 2% for inflation.

Local bonds were much weaker in the mid-morning session, with the yield on the benchmark R186 fetching 9.045%, its highest level since mid-December. Bond yields move inversely to prices; as yields rise, prices drop and vice versa.

At 10.32am, the rand was at R13.3804 to the dollar from R13.3241, R15.7039 to the euro from R15.6496 and R17.8419 to the pound from R17.8158. The euro was at $1.1736 from $1.1745.