Rand strengthens as US Federal Reserve cuts interest rates

Zweli Mokgata

Zweli Mokgata

The US Federal Reserve's 50 basis point cut yesterday saw investors jumping into South African stocks resulting in a six-week high for the local currency.

By late afternoon trade the rand was trading at about R7,06 after hovering between R7,15 and R7,40 for the past two months.

Umbono Fund Managers chief executive officer Tendai Musikavanhu said that it was a general trend for world economies to lower interest rates and "ease off on monetary tightness".

Musikavanhu said that given the recent sub-prime crisis and the inverted yield curve in the US, there was pressure to reduce short-term interest rates by the US Federal Reserve.

"South Africa might respond in the same way depending on how the Monetary Policy Committee reacts," said Musikavanhu.

"There are conflicting forces that are driving their decision. On the one hand trends say the US is hinting at a reduction and on the other hand the local economy is showing some inflationary pressures due to the effects of a high oil price," he said.

Brent crude oil went above $82 a barrel yesterday in response to the Federal Reserve's announcement. This despite the Organisation of the Petroleum Exporting Countries' (Opec's) move to increase output by 500000 barrels a day.

"Despite the high oil price, the interest rate cut was good for the local currency and economy," said Musikavanhu.

The JSE all share index was up more than 700 points on its way back to the 30000 point mark, led by Anglo American and BHP Billiton. Trade remained steady throughout the day with most Top 40 shares showing growth.

Gold, one of South Africa's leading exports, was also boosted by the interest rate cut and for the first time broke through the $720 mark.