The South African rand started the new year on a sour note, falling sharply against the U.S. dollar on Tuesday.
Based on a report by Reuters, the rand traded at 18.5750 per dollar at 1540 GMT, down 1.6% from its previous close. The dollar, meanwhile, rose 0.7% to 102.13 against a basket of major currencies, its biggest daily gain since October.
The Federal Reserve signaled it would reduce its bond-buying program and possibly raise rates sooner than expected, driving the strength of the dollar by expectations of higher U.S. interest rates this year.
The Federal Reserve will release its minutes from its December meeting on Thursday, and the U.S. jobs report on Friday will provide more clues on the timing and pace of the Federal Reserve’s policy tightening.
Rand Under Pressure
The rand, one of the most volatile emerging market currencies, has been under pressure from domestic and external factors.
On the domestic front, South Africa is facing a resurgence of COVID-19 cases, driven by the omicron variant, which has strained its health system and dampened consumer and business confidence.
The country is also grappling with high inflation, low growth, power outages, and political uncertainty ahead of the ruling African National Congress’s leadership conference later this year.
On the external front, South Africa is vulnerable to shifts in global risk appetite and capital flows, as it relies on foreign investors to finance its large current account and fiscal deficits.
The rand’s depreciation could worsen inflation, which hit a 10-year high of 6.9% in November, well above the central bank’s target range of 3-6%. The South African Reserve Bank hiked its benchmark interest rate by 25 basis points to 4% in November and is expected to tighten further this year to curb inflation and support the rand.
Silver Lining
Despite the rand’s woes, some analysts see a silver lining for the South African economy.
They argue that the omicron variant, while highly contagious, appears to cause less severe illness and hospitalizations than previous variants, which could limit the need for harsh lockdowns and allow the economy to recover faster.
They also point out that the rand’s weakness could boost the competitiveness of South Africa’s exports, especially commodities, which account for more than half of its total exports. South Africa is a major producer of gold, platinum, coal, and iron ore, among other minerals.
Moreover, they note that South Africa has made some progress in implementing structural reforms, such as easing visa rules, opening up the energy sector, and improving governance at state-owned enterprises, which could improve its growth potential and fiscal outlook in the long term.
