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How weaker dollar may impact SA

A Fin24 user is worried about speculation on the dollar. He writes:

Many are speculating that the dollar will fall either this year or next, due to the extensive printing of the US dollar.

Should the dollar collapse, what would the net effect be on South Africa, in terms of the price of oil, gold and silver, exchange rates and local food prices?

Marius Fenwick of Mazars Financial Services responds:

Since 2007/2008 and the onset of the global financial crisis the dollar has depreciated substantially against other major currencies.

Today there are many scenarios at play and the dollar can move either way.

Should the Fed start tapering off their quantitative easing during 2014, as stated by Ben Bernanke, then chances are that the dollar will strengthen since the printing of dollars will reduce.

It is the intention of the US to reduce the printing of dollars in any way.
 
Your question is, however, what will happen to the financial position of South Africans if the dollar collapses?

Basically, people relying on imports will benefit, since one rand will be able to buy more units of items that are priced in dollars. This includes companies that import goods and components.

Fuel prices will decrease (based on the rand based oil price and assuming that the dollar oil price remains unchanged). Imported food priced in dollars will become cheaper.

All these factors should lead to a lower inflation environment for South Africans.

The gold and silver prices are more than currency dependent and the gold price in particular will be influenced more by inflation concerns and countries stocking up their gold reserves.

It may happen that, should the dollar collapse, certain countries and gold investors may see a long term opportunity to buy gold cheaply in their own currency, which will increase in value in time compared to the dollar.

A lower dollar may also be inflationary to the US strengthening the demand for gold. The increase in demand may lead to a higher gold price.
 
South African exporters, on the other hand, will suffer if their goods are priced in dollars.

These include our mines, farmers that rely on exports and manufacturers that produce for the overseas market.

Our local manufacturers will come under pressure from cheaper imported goods. Our clothing industry is a good example where imported Chinese goods have caused havoc for some years now.

Bear in mind that even though our currency is the rand, the majority of international traders (importers and exporters) trade in US dollars.
 
Exchange rates are predominantly a function of inflation.

If inflation increases, generally interest rates are increased and vice versa.

Since it is expected that inflation in SA will remain lower in a weak dollar environment, it will be expected that interest rates will remain low in SA.

Should the US increase their interest rates to counter their expected rising inflation, then SA may follow the trend.

We compete with the developed world to attract investors and with SA being an emerging market our interest rates will always be higher than the developed world.

This is due to our inflation rate generally being higher than theirs and the premium that we must offer investors to incentivise them to invest in a riskier market.

These movements do not happen overnight and markets, in particular the fixed interest market, generally price in these anticipated interest rate adjustments.
 
In conclusion:

The US is still the largest economy in the world and what happens there affects the whole world.

The US has made it clear that things have to start returning to normal.

The only way that can happen is for them to stop “feeding” the economy by pumping money into the system by buying up bonds currently at a rate of approximately $85bn per month.

If anything, their printing of money will stabilise and it is unlikely that it will increase.

Both the employment figures as well as the house price index in the US are looking better and heading in the right direction.

Currencies will always fluctuate, but given the rate at which the US dollar depreciated since 2007/2008, it is unlikely that it would collapse.

The whole world depends on the dollar since the world trades in dollars. The US's competitors (Europe, China and Japan) are very wary of the competitive advantage that the US will have as an exporter with a weaker currency.

There have been discussions to replace the dollar with an alternative “trading currency” and China has increased its trading in its own currency (renminbi).

America would not want the world to move away from trading in US dollars.

Also bear mind that SA’s main trading partner is the eurozone and there are so many scenarios that may and will play out over the next decade.

The world has become a inter-woven, complex playground and many economic theories of old have been proven wrong since 2007.

No one as yet has claimed that they predicted the financial fiasco that started in 2007 and in particular the collapse of the banking system in the developed world.

No one can say with certainty when and how the world economy is going to be healed.

In the same vain, no one can say with certainty how the dollar or any other currency is going to react over the next five years.

- Fin24

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