Photo by Simphiwe Mbokazi.

JOHANNESBURG - South Africa's rand steadied against the dollar on Thursday after rallying 1.5 percent overnight due to strong demand for local bonds by foreign accounts, and could rally further on hopes of additional stimulus for struggling leading economies.

The yield for the three-year paper was down two basis points at 5.37 percent in early trade and that for the 14-year issue fell 4.5 basis points to 7.29 percent.

The rand briefly touched a session high of 8.3955/dollar, close to Wednesday's strongest level of 8.39, and was barely changed at 8.4000 by 0653 GMT.

“The rand has come off its recent weakest levels on the back of some bond purchases and the euro has also rallied a bit,” a Johannesburg-based trader said.

“You're going to start to run into dollar support at these levels under 8.40, but certainly if bonds and equities carry on performing well then we should find some sellers again around 8.45/46.”

About 530 million rand flowed into the local bond market from non-resident accounts on Wednesday, stock market data showed.

The rand could also benefit from speculation that global authorities might provide additional and coordinated stimulus measures to counter dismal global growth and the deepening euro zone debt crisis, Absa Capital said in a note.

“Given the concerns in many of the developed economies, there is also a growing argument that investors could flock to emerging markets for safety and if such decoupling did occur, the rand is likely to be one of the biggest beneficiaries,” it said.

The rand tends to take the brunt of global market volatility because South Africa's markets are very liquid, making it easy for portfolio investment to flow in and out rapidly.

The currency plunged to a three year low of 8.71/dollar in early in June as investors fearing contagion from the euro zone dumped emerging market assets traditionally perceived as carrying higher risk. - Reuters