The rand slipped to a fresh five-month trough on Monday morning, as the dollar’s extended strength looks likely to leave central banks in a corner.
The dollar’s moves have been fast and fierce, leaving currencies in both emerging and developed markets gasping for air.
The rand was within striking distance of R13/$, from R11.50 barely three months ago, demonstrating the destabilising effect of the dollar.
SA’s Reserve Bank is widely expected to keep interest rates on hold when its monetary policy committee ends its scheduled meeting on Thursday, but markets will closely monitor its language to get clues on its policy outlook.
It was only a few weeks ago that some economists and analysts were predicting a further 25-basis-point cut in rates, before global developments flipped this possibility on its head.
“The US dollar is a barometer for the changing global liquidity environment. A stronger dollar is a reflection of tighter global financial conditions, which is not conducive for risk assets,” Nedbank Corporate & Investment Banking analysts Neels Heyneke and Mehul Daya wrote.
“On the flip side, a weaker dollar is a reflection of easier global financial conditions and bodes well for the performance of risk assets like the rand.”
The relentless strength in the greenback prompted Indonesia’s central bank to increase interest rates by 25 basis points last week, joining Turkey and Argentina, which have tightened their policy to stem the slide in their currencies.
The recent run of disappointing data from the eurozone and the UK have contributed to the strength in the dollar, with markets betting that the European Central Bank (ECB) will keep its policy setting loose for longer, while the Bank of England could delay its interest rate increase.
“Macroeconomic data from the US and Europe will continue to confirm what we already know — weak eurozone and strong US growth — implying that the growth differential is widening in favour of the US and the dollar. The Fed will remain on course to hike three to four times by year-end,” Rand Merchant Bank analyst Isaah Mhlanga said.
Faster increases in interest rates in the US could detract from the so-called carry appeal, where money is borrowed in low interest rate environments and invested in currencies that offer higher returns.
At 9.24am, the rand was at R12.8583 to the dollar from R12.7755, at R15.0740 to the euro from R15.0363 and R17.2476 to the pound from R17.2044
The euro was at $1.1723, from $1.1773.