File picture: Philimon Bulawayo
Johannesburg - The rand broke through the psychological barrier of R13 to the dollar and was trading at R12.93 by 8am on Thursday - its strongest levels since August 2015.

The rand led the rally by emerging markets, advancing the second strongest behind the Seychelles rupee among more than 150 world currencies after the US Federal Reserve hiked rates moderately on Wednesday in a dovish tone that suggested a moderate monetary tightening policy.

The rand opened at R13.0317 against the dollar, hitting a low of R12.6820 before settling at R12.7330 by the close of markets yesterday.

Since Wednesday, the rand has gained more than 40 cents against the greenback.

Rand Merchant Bank currency strategist John Cairns said in a note sent to clients yesterday that the rand was expected to make further gains, though the appreciation would probably be slow and unsteady.

He said that after increasing the interest rate, the Fed had stuck to its projections of thad been expected by many.

“The rand has shifted to the stronger end of its range, following the rates hike, but does not look it can be stronger,” Cairns said.

He said the Fed had indeed hiked, but it was otherwise more dovish than anticipated.

Read also: Gold to rise after Fed move

“The median of Fed member projections for hikes has remained at two for the rest of this year and three for next year, while the statement made it clear that they will not tolerate a temporary inflation overshoot.”

A former Fed governor said interest rates in the US should have hit normal levels of around 3percent by now, as the Federal Reserve had achieved all its targets.

Robert Heller reiterated his opinion that the Fed should have moved quicker to guide rates higher after the US central bank increased its benchmark rate by a quarter point on Wednesday to a target range of 0.75 percent to 1 percent.

Heller served on the Fed’s board from 1986 to 1989 under former president Ronald Reagan.

“We have a very low unemployment rate of 4.7 percent, we have inflation roughly at 2 percent, so rates should be normal now. And normal would be at 3 percent. Instead, we are below 1 percent,” he said.

Read also: Fed raises interest by 25 basis points

Cairns said the market pricing for hikes had eased only slightly.

He said the odds of a June move had now eased to 50-50 percent, down marginally from 55 percent and to 20 percent to 25 percent on another three or more hikes this year.

Cairns said: “The rand strengthened immediately after the press conference. This is usually considered a fairly normal response.

"The surprise, however, is that it reacted so strongly after having completely ignored far bigger challenges in Fed pricing over the past two weeks - effectively the rand ignored a massive upward shift in hike expectations and then reacted strongly to a mild downward shift."

He said the rand’s strange reaction function could be best explained by complex arguments around inflation and the Fed’s tolerance.

“A simpler and more meaningful explanation is that the pressure is for rand gains. One wonders then when a rand that breaks stronger out of the range is only a matter of time.”