Rand slumps to 11-month low

The Rand slumped to 6.8411 against the greenback on Tuesday, as gold fell under US$600 an ounce for the first time since April.

South Africa is the world’s largest producer of gold, and is often adversely affected by price fluctuations of the precious metal, with price slumps often translating into a weaker currency.

“The rand seems to be in all sorts of trouble at the moment,” a local analyst said.

Gold prices fell by more than 5 percent on Monday, to trade at $571.25 an ounce and triggered an almost immediate fall of the Rand.

Only last month gold prices hit a record $730.40 an ounce.

Market watchers said the fall in gold prices had partly been caused by fears that the US could hike interest rates again to reign in the rapidly increasing threat of rising inflation.

US Federal Reserve Chairman Ben Bernanke is believed to have expressed concerns that inflation was slowly becoming more and more of a threat to the US economy, in the process hinting at yet another interest rate hike.

The result has been a global rate hike that saw central banks around the world raising interest rates last week and consequently triggering concerns of a slump in demand for commodities around the world.

Analysts said a fall in demand for goods could threaten international economic growth, which has mostly been carried forward on the back of rising consumer demand in recent years.

South African Reserve Bank governor Tito Mboweni announced an interest rate hike two weeks ago, though market watchers said it could have adverse effects on foreign investor sentiment.

Analysts say the fall of the rand could have adverse effects on foreign investment in the country, even if interest rates to manage to stabilise.

“When there is uncertainty about future exchange rate movements, investors become wary of potential erosion of their investments by a weak currency. So even when domestic interest rates rise, foreign investors might not move their money into the domestic market because of uncertainty about future exchange rate movements,” Absa bank treasury economist Monale Ratsoma told a local daily last week.

The lower gold price also had a ripple effect on the local bourse, which saw stocks tumbling and the Johannesburg Stock Exchange’s all share index falling 4 percent to 18415 points on Tuesday.

Market reports said the JSE had been “dragged down” by the gold index which lost 10 percent of its value due to the price slump.

All other indices also registered falls, with the resources and financial indices both falling 4.3 percent, while industrials lost 3.1 percent.

International media reports said the currency slump had taken an “international dimension”, as currencies in a number of emerging markets apart from South Africa also slumped.

Currency weakness reportedly spread from Indonesia to South Africa, Poland , Turkey and Brazil , while high-yielding developed world currencies such as the Australian and New Zealand dollars also fell.

The US dollar apparently remained high due to its emerging ole as a “safe haven” to which investors turn in time of financial uncertainty.

June 2006
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