Rand continues downward spiral

Johannesburg - The rand continued to trade at fresh five-and-a-half year worst levels against the dollar in noon trade on Monday amid falling equities and rising risk aversion.

The local currency weakened to R8.7272 against the dollar - its worst level since January 2003.

The US rescue package, which was passed by regulators on Friday night, has failed to calm jittery global markets, with Asian stocks and emerging market currencies coming under pressure on Monday morning.

At 12:10 the rand was bid at R8.7250 to the dollar from a previous close of R8.5200. It was bid at R11.8239 to the euro from a previous R11.5985 and at R15.3080 against sterling from R14.9567 before.

The euro was bid at $1.3564 from $1.3629 overnight, while gold was quoted at $839.72 a troy ounce from $836.50/oz overnight.

RMB said that the rescue package was approved late on Friday by the US House of Representatives but the 'credit cancer' has spread and threatens to engulf Europe in an ever tighter squeeze. German, French, Italian and British officials met over the weekend to discuss details on a coordinated EC approach
to the crisis and Hypo Real Estate Bank found a rescuer.

The rand ended slightly firmer in Friday trading to R8.48 but after a sell off in early Asian trade opened at R8.5870 per dollar as uncertainty spreads and risky assets continue to trade on the back foot.

The main factor driving the rand is not the local political transition, but Wall Street, says director and chief economist of Econometrix Dr Azar Jammine.

"The rand is going up and down depending on what happens on Wall Street. It is quite uncanny to see how the rand follows the Dow Jones," he says.

Jammine explains why this is so: "The rand is the primary vehicle through which international investors express their risk aversion to emerging markets. For example, when they are pessimistic, they sell the rand."

Dow Jones Newswires reports that falling equities and rising risk aversion left the dollar mostly higher, with the yen soaring and the euro tumbling sharply lower in Europe on Monday.

Sentiment was being driven largely by disappointment that European leaders who met in Paris at the weekend didn't come up with a coordinated plan to battle the credit crisis.

The euro appears to have been hit by the assumption that each country must go solo after German Chancellor Angela Merkel said "each country must take its responsibilities at a national level."

"The market didn't like this," said John Hardy, chief currency strategist at Saxo Bank in London, adding that the euro "was punished" from the start of Asian trading earlier in the day.

The fact that Germany also had to announce a unilateral deposit guarantee scheme, after the recent support package for Hypo Real Estate started to fall apart, didn't help sentiment.

Other European countries, including the UK may be forced to follow the German move to prevent cross-border flows as savers seek the safest deposit accounts.

Some analysts reckon that the failure of European leaders to produce anything more concrete increases the chances of a large rate cut by the European Central Bank.

"Given the absence of any significant plan at the European level to manage the crisis more proactively, we believe that the odds of a 50-basis-point cut by the ECB have increased significantly," said Jacques Cailloux, an economist with Royal Bank of Scotland.

There is also talk that the Bank of England could cut its rates by as much as 50 points at its next policy meeting on Thursday.

- I-Net Bridge