Rand Climbs Against Dollar on Widening Interest-Rate Advantage

By Garth Theunissen

Nov. 7 (Bloomberg) -- South Africa's rand snapped two days of declines against the dollar and the euro as interest-rate cuts in Europe and Asia increased the relative attractiveness of the country's higher-yielding assets.

The gains pared the currency's decline versus the dollar this week to 2.9 percent. The Bank of Korea lowered its key interest rate for the third time in four weeks today following reductions yesterday in the euro region, U.K. and Switzerland. The rand has lost more against the dollar this week than all but two of 16 major counterparts.

``We are seeing a technical rebound in the rand after rate cuts around the world,'' said Russell Lamberti, an analyst in Johannesburg at Econometrix Treasury Management, which advises clients on bond and foreign-exchange transactions. ``Relatively high domestic interest rates cushion the rand by making it more expensive to short. It does give us a yield advantage over other markets.'' A short position is a bet an asset will weaken.

The rand strengthened as much as 3.5 percent to 9.9251 per dollar and was at 10.0852 by 1 p.m. in Johannesburg, from 10.2850 yesterday. South Africa's currency will trade toward 8 per dollar by mid-2009, according to Lamberti.

It also appreciated 1.5 percent to 12.8937 per euro, paring its weekly decline against the European currency to 3.6 percent.

Gains for the currency may be limited after the South African Reserve Bank said the nation's foreign-currency reserves fell 4.4 percent to $32.9 billion by the end of October, compared with September. Reserves were expected to drop 1.2 percent, according to the median estimate of five economists surveyed by Bloomberg.

Rate Differential

Yesterday's interest-rate cuts left South Africa's 12 percent benchmark rate 900 basis points higher than the U.K.'s and 875 basis points more than the euro-region's. It's also 1,170 above Japan's key rate.

``In an environment where you have an overvalued yen and an undervalued rand, one has to assume investors are going to start nibbling at the carry trade again,'' said Lamberti. ``That's especially true given the interest-rate differential between the two countries.''

In carry trades, investors borrow a currency at a low interest rate and invest the proceeds in markets where returns are higher. They earn the spread between the two, while taking the risk currency moves will erase their profit.

Government bonds advanced in the week, with the yield on the benchmark 13.5 percent security due September 2015 losing 45 basis points to 8.64 percent. The yield on the 13 percent note maturing in August 2010 dropped 56 basis points to 9.11 percent. Yields move inversely to bond prices.

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