Johannesburg - South Africa's rand retreated from 1-1/2 week highs against the dollar on Tuesday as euro zone worries hit riskier emerging market assets, but government bonds edged up ahead of their inclusion in Citigroup's World Government Bond Index next month.

The rand was affected by worries about liquidity problems in the euro zone. which investors fear could spread if policymakers fail to come up with concrete resolutions.

Europe is traditionally South Africa's largest trading partner bloc and the rand has tended to be susceptible to swings in sentiment as policymakers grapple with debt problems in that region.

The rand bounced off a session high of 8.3360/dollar, its strongest level since July 27, and was at 8.41 by 16h30 GMT, down 0.3 percent on the day.

“We believe that the rand will remain on the back foot until prospects for global economic growth and commodity prices turn the corner,” said Bruce Donald, a strategist at Standard Bank.

“However, there could be some near-term respite for the rand should the European Central Bank announce a much-awaited bond purchase programme this week.”

Foreign accounts are still overall attracted to local debt though, partly due to the imminent inclusion in the WGBI, with net inflows of nearly R5-billion seen during August, according to data from the JSE exchange. Buying of government bonds on Tuesday pushed yields to late July lows.

Demand was strong at the Treasury's weekly auction for R2.1-billion worth of bonds, pushing yields sharply lower compared to last week.

On the secondary market yields also fell, with the three year paper easing four basis points to 5.385 percent while the 14-year paper was down 4.5 basis points at 7.315 percent. - Reuters