South African Rand Strengthens Against Dollar, Erasing Decline

By Garth Theunissen

July 24 (Bloomberg) -- South Africa's rand strengthened against the dollar, erasing declines.

The rand rose to 7.5503 per dollar by 9:38 a.m. in Johannesburg and traded as high as 7.5368, from 7.5687 late yesterday. Earlier it fell 0.2 percent to 7.5860. The currency climbed yesterday to 7.4650, the strongest level since May 30.

South Africa's currency has risen more than 7 percent since June 12, when the central bank raised the key interest rate by a half-point to 12 percent, a five-and-a-half-year high. The rand has offered the best carry-trade return against the dollar, euro and yen over that period, according to data compiled by Bloomberg. It had a negative carry-trade return yesterday.

The rand is ``ripe for a correction'' against the U.S. dollar given accelerating inflation and a slowing economy, Bank of America Corp. senior trading strategist Lawrence Goodman said in an interview yesterday.

The South African Reserve Bank, led by Governor Tito Mboweni, has increased the key interest rate 10 times since June 2006 to curb inflation that has exceeded its 3 percent to 6 percent target range for 14 months. Price growth quickened to an annual 10.9 percent in May, the fastest since November 2002. Growth in Africa's biggest economy slowed to 2.1 percent in the first quarter, the weakest rate in six years.

In carry trades, investors borrow a currency at a low interest rate and convert the proceeds into one they can lend out for a higher return, earning the spread between the two. They take the risk currency moves will erase their profit. South Africa's main interest rate is 1,050 basis points above Japan's and 925 basis points higher than Switzerland's.

The rand is the worst performer of its 16 most-traded counterparts monitored by Bloomberg this year, falling 8.8 percent versus the dollar and more than 15 percent against the euro.

Government bonds advanced, with the yield on South Africa's benchmark 13.5 percent security due September 2015 losing 2 basis points to 9.86 percent. Yields move inversely to bond prices.

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