By Peter Garnham
Published: January 31 2008 11:14 | Last updated: January 31 2008 16:37
The South African rand took another tumble on Thursday after the country’s central bank left interest rates on hold after its policy meeting.
Despite rampant inflationary pressures, the Reserve Bank of South Africa said it took the decision to leave rates on hold at 11 per cent since its expected growth to slow this year.
Marc Chandler at Brown Brothers Harriman said the SARB had a tough decision to make since, along with rising prices, it was facing downside risks to the economy from the global slowdown and from local energy shortages.
“Despite still-high interest rates, we think the rand is likely to remain under pressure,” he said. “Risk appetite is low, and so we stress again that currencies that have weak fundamentals are most at risk.”
By late-morning in New York, the South African rand, which has slumped 10 per cent against the dollar so far this year, fell 2 per cent to R7.4925.
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Meanwhile, the dollar pulled back from a record low against the Swiss franc and a two-week trough against the euro as worries over the health of the financial system hit market sentiment.
The dollar fell and equities rallied after the Federal Reserve followed last week’s emergency 75 basis-point cut in its Fed funds rate with another 50 basis-point move on Wednesday, taking rates down to 3 per cent.
The dollar dropped to a low of Sfr1.0759 against the Swiss franc and $1.4914 against the euro, less than a cent away from the record trough of $1.4968 it hit against the single currency last November.
However, the dollar rallied as talk of widespread failure among US bond insurers heightened fears over banks which use them to protect their assets and sent equities lower. Analysts said the resulting drop in risk appetite boosted low-yielding currencies, which have been widely used by carry trade investors to fund the purchase of riskier, higher-yielding assets.
“In a little more than one week, the US central bank has lowered interest rates by 125 basis points, turning the dollar into a de facto carry trade funding currency,” said Chris Huddleston at Close Brothers.
The dollar pulled back to stand up 0.3 per cent at $1.4840 against the euro and down just 0.1 per cent at SFr1.0813 against the Swiss franc.
The dollar also rose 0.2 per cent to $1.9865 against the pound, but fell 0.4 per cent to Y106.05 against the lower-yielding yen.
Meanwhile analysts said a flurry of economic data from the eurozone hinted at the potential problems lying in wait for the European Central Bank in the months ahead.
Eurozone consumer confidence tumbled by more than expected in January, while German retail sales slumped and eurozone inflation rose to an annual rate of 3.2 per cent - a fresh high and above the ECB’s target rate.
Neil Mellor at Bank of New York Mellon said the new high in inflation raised the risks of stagflation - rising prices accompanied by economic contraction - in the region.
“In previous times the ECB’s focus of price stability would have seen the euro vault higher on the back of renewed potential for a rate hike,” he said.
“However, with growth issues occupying more of the market’s attention, interest rate expectations became desensitised to talk of inflation risks some time ago and accordingly, the euro barely reacted.”
The euro fell 0.1 per cent to £0.7464 against the pound, lost 0.4 per cent to SFr1.6056 against the swiss franc and dropped 0.6 per cent to Y157.37 against the yen.
Copyright The Financial Times Limited 2008