Graphic: renjith krishnan

South Africa's rand rallied as much as 1.1 percent against the dollar on Tuesday to its strongest level in 7-1/2 weeks, boosted by increased demand from local companies repatriating their foreign currency to meet corporate year-end needs.

Government bonds also strengthened, pulling yields to multi-month lows as demand from foreigners rose, particularly at the higher end of the curve.

The rand strengthened to 8.0619 earlier in the session and was at 8.0730 by 17:53 SA time, up 1.01 percent from Monday's close of 8.1550.

“The rand has improved a lot in the last 2-1/2 days and a lot of it has to do with the fact that Friday was year-end for a lot of companies in South Africa so there's been a lot of repatriation of foreign currency accounts and balances,” said Ion de Vleeschauwer, chief dealer at Bidvest Bank.

The local unit should however meet resistance towards 8.00/dollar, with importers keen to buy dollars at current levels, he added.

The rand, which slumped to a three year low of 8.71 last month as investors fretted over euro zone debt problems, has gained more than 4 percent over the past week on optimism that leaders in the bloc are making headway in resolving the crunch.

“The rand regained a lot of ground it lost in the initial risk sell-off as market participants unwind their short rand positioning and along with this we have also seen very good inflow into our bond market which in itself lends support to the currency,” Absa Capital trader Duncan Howes said.

Fixed income yields fell sharply on Tuesday, with the three year benchmark touching an all-time low of 5.95 percent before coming back slightly to close at 5.96 percent, down seven basis points on the day.

The yield for the longer-dated 2026 paper fell nine basis points to 7.865 percent, its weakest level since early September last year.

The government's weekly auction for 2.1 billion rand worth of paper was well supported, with the 14-year issue attracting a bit to cover ratio of 4.95. - Reuters