The rand continued its descent yesterday (Tues) on the back of a stronger US dollar, falling to its weakest in 23 months.
The domestic currency has come under severe pressure from aggressive monetary policy tightening by the US Federal reserve and the general risk-off sentiment plaguing markets.
The rand weakened to R17.18 to the greenback during early trade, the lowest since August 2020, also dragged lower by weakening commodity prices amid fears of rising US inflation rate, before pairing gains to R17.04/$1 by 4pm.
According to a poll by Bloomberg, inflation in the US is expected to rise 8.8 percent year-on-year in June compared with 8.6 percent in May.
If expectations meet reality, this would mark the fastest increase in consumer prices since the 8.9 percent figure back in December 1981.
The dollar index also climbed to its highest levels in 20 years yesterday as investors looked to hedge against surging inflation and recession risks with the safe-haven currency.
Expectations that the US Federal Reserve will continue to aggressively raise interest rates also supported the dollar, as a stronger-than-expected jobs report and upcoming US inflation data could bolster the central bank’s tightening plans.
Higher than-expected inflation figures could persuade the South African Reserve Bank to hike interest rates quicker than initially expected.
FXTM senior analyst Lukman Otunuga said the mighty dollar flexed its safe-haven muscles with the dollar index hitting its highest levels since 2002 ahead of the much-anticipated US inflation figure for June.
“The negative vibe and sense of uncertainty across financial markets could fuel further dollar upside while dragging equities lower,” Otunuga said.
“Given how markets remain highly sensitive and reactive to anything regarding inflation, today’s pending US CPI report could spark fireworks.”
The markets have also been fretting about the outlook of the global economy amid fears of an impending global recession, with rising Covid-19 cases in China adding to fears of slowing global economic activity.
International metals prices have fallen by 28.1 percent year-on-year in July to date, placing pressure on the rand to depreciate.
Gold traded around $1 730 an ounce yesterday, hovering its lowest level in 9 months, as investors opted for the dollar as a hedge against surging inflation and recession risks over the metal.
Investec chief economist Annabel Bishop said the weakening commodity prices were affecting the rand’s performance as South Africa is one of the world’s exporters.
“The risk averse environment in global financial markets has negatively impacted metals prices too,” Bishop said.
“Global financial market risk-off, driven by a number of factors, has been responsible for both rand weakness and the weakness in metals prices adding in turn to rand weakness, but most of the depreciation has been due to US dollar strength, which will likely persist over the third quarter.”