Rand Headed for Biggest Weekly Drop in 5 Years as Stocks Plunge

By Garth Theunissen

Oct. 10 (Bloomberg) -- South Africa's rand headed for its biggest weekly drop in almost five years against the dollar as a global stock-market rout prompted investors to shun higher- yielding, emerging-market assets.

The rand also slumped to its weakest level since November 2002 on bets the financial turmoil and banks' reluctance to lend to each other will push the global economy into a recession, slowing capital flows to emerging markets. Group of Seven finance ministers and central bankers meet today and tomorrow in Washington to discuss the credit crisis that has wiped more than $4 trillion off the value of equities around the world this week.

``All emerging-market currencies are falling because there simply isn't enough confidence in the global financial system,'' said Jon Harrison, an emerging-markets currency strategist at Dresdner Kleinwort in London. ``There are simply too many sellers and too few buyers for assets in emerging markets, which are seen as too risky in the current environment.''

The rand slid as much as 1.3 percent to a six-year low of 9.4901 per dollar and was at 9.2846 by 4:20 p.m. in Johannesburg, from 8.4891 on Sept. 3. It fell 9.2 percent this week, the steepest five-day loss since December 2003.

Harrison recommends clients ``stay out of all emerging- market currencies'' until the global financial crisis abates.

``The market is so illiquid it's difficult to trade because offers are so wide and volumes so small that even small trades can move the market,'' Harrison said, adding it would be ``meaningless'' to forecast a trading range for the rand.

Stocks Fall, Gold Gains

Stocks fell around the world on concern the deepening credit crisis will spur the failure of more financial companies, while gold climbed to the highest level in almost 11 weeks as investors sought the metal as a haven.

The MSCI World Index lost 3.9 percent, driving it to its worst week in more than three decades. The MSCI Asia Pacific Index lost 17 percent in the week, the biggest slump since the measure was created in December 1987. The FTSE/JSE Africa All Share Index dropped 10.4 percent this week, the biggest five-day retreat since August 1998.

``The local stock market is collapsing because foreign investors are repatriating money to cover losses,'' said Grant Barrow, head of foreign-exchange trading at Investec Capital Markets in Johannesburg. ``Speculators have sniffed blood and are trying to make money by shorting the rand, which just adds to the mayhem.''

Global equities slumped even as central banks from London and Frankfurt to Washington and Hong Kong were forced to cut interest rates after the yearlong credit-market seizure stoked concern banks will run short of money.

U.S. Treasury Secretary Henry Paulson and top aides are still considering options on how to proceed with a $700 billion bank bailout plan while the U.K. is engineering a 50 billion pound ($87 billion) strategy to partly nationalize at least eight British banks.

South African government bonds rose in the week, with the yield on the benchmark 13.5 percent security due September 2015 losing 2 basis points to 8.90 percent. Yields move inversely to bond prices.

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