South Africa Rand Falls on Speculation Importers Buying Dollars

By Garth Theunissen

June 26 (Bloomberg) -- South Africa's currency dropped on speculation the country's importers sold it to buy the dollar after the rand rose to the highest level in more than two weeks yesterday.

The rand snapped a two-day gain versus the dollar, and was the worst performer of the 16 major currencies, as traders bet importers used its 2 percent advance yesterday to buy dollars, euro and yen at cheaper rates. The rand fell even as economists forecast producer inflation would stay at 12.4 percent in May, according the median estimate of 16 analysts surveyed by Bloomberg News.

``We've seen strong importer demand for dollars this morning,'' said David Gracey, head of currency trading in Johannesburg at Nedbank Capital. ``Importers usually try to shore up foreign-exchange purchases following a rand rally.''

The rand slipped as much as 0.7 percent to 7.9095 per dollar, and was at 7.8898 by 11 a.m. in Johannesburg, from 7.8547 yesterday. Against the euro the rand fell 0.6 percent to 12.3787.

``Importers are finding current levels attractive to increase dollar holdings,'' said George Glynos, managing director in Johannesburg at Econometrix Treasury Management, which advises clients on bond and foreign-exchange transactions. ``They need to do business daily so they tend to jump in and buy after a rand rebound.''

The rand gained by the most since March 18 yesterday after stronger-than-expected inflation data raised the likelihood policy makers will lift interest rates, spurring demand for so- called carry-trade purchases of the currency.

Carry Trade

In these transactions, investors borrow a currency at a low interest rate, convert the proceeds into one they can lend out for a higher return, such as the rand. They earn the spread between the borrowing and lending rates, taking the risk currency moves will erase their profit.

South Africa's 12 percent main lending rate compares with borrowing costs of 0.5 percent in Japan, 2 percent in the U.S. and 2.75 percent in Switzerland.

Inflation in Africa's largest economy accelerated to an annual 10.9 percent in May, exceeding the 10.8 median estimate of 20 economists surveyed by Bloomberg, a report yesterday showed.

The South African Reserve Bank, led by Governor Tito Mboweni, raised the benchmark rate a half-point on June 12 and forecast price-growth will exceed its 3 percent to 6 percent target until the third quarter of 2010.

``After yesterday's inflation number we revised our inflation forecast,'' said Glynos. ``We see inflation peaking at around 13.1 percent in August.''

Government bonds fell, with the yield on South Africa's benchmark 13.5 percent security due September 2015 rising 3 basis points to 10.63 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net