Rand drops after Fed stimulus disappoints

Graphic: Renjith Krishnan.

South Africa's rand weakened against the dollar on Thursday, mirroring a dip in the euro, after the US Federal Reserve disappointed markets by failing to introduce an aggressive bond-buying programme to support a stalling economic recovery.

The rand weakened almost half a percent against the greenback to 8.22 by 08:13 SA time, from Wednesday's New York close of 8.1805. The rand often tracks the euro, the currency of its largest trading partner.

Rather than announce “QE3” late on Wednesday, the Fed expanded its “Operation Twist” by $267 billion, meaning it will sell that amount of short-term securities to buy longer-term ones to keep long-term borrowing costs down.

“The Fed's decision to extend Operation Twist and to implement nothing more has left EUR/USD struggling to break 1.2700 and USD/ZAR languishing at 8.20,” Rand Merchant Bank said in a note.

South African bond yields dropped to all-time lows this week after consumer inflation braked to 5.7 percent in May, back into the central bank's 3-6 target range and giving policymakers more scope to cut already historically low rates if they see fit.

On Thursday, the yield on the three year bond rose 1.5 basis points to 5.985 percent and that on the 14-year paper rose 2.5 basis points to 7.985 percent.

The South African Reserve Bank is due to release its Q1 current account figures on Thursday. Economists are forecasting that the deficit will have swollen to 4.5 percent of GDP from 3.6 percent in the previous quarter. - Reuters