October 1, 2003

By Vernon Wessels

Johannesburg - The rand reached its best level against the dollar in more than three years yesterday.

It surged against the euro and sterling as a raft of positive domestic economic data lifted hopes for further interest rate relief before the end of the year.

The local unit gained as much as 24c to an intraday best of R6.8713 against the beleaguered US currency, which sank to its worst level in almost three years against the yen and three-month lows against the euro.

Job losses in the world's largest economy battered the confidence of American consumers and renewed fears that the US economic recovery may not be sustainable in the face of a widening current account deficit.

The rand was trading at R6.95 a dollar shortly after 6pm from R7.1137 late the previous day as a break below R7 for the first time since August 2000 triggered automatic buying orders.

The rand has gained almost 24 percent this year, making it the strongest performer against the dollar among the 59 currencies monitored by news agency Bloomberg.

The rand added almost 27c against the euro to last trade at R8.0980 and more than 30c against the pound to trade at R11.5396.

"The mood is exceptionally positive. There was strong offshore demand for rands following overnight weakness in the dollar," a foreign exchange trader said.

"The rand will probably target a break under R6.80 a dollar, after which we can be looking at R6.50, but we will have to watch what happens to the dollar.

"The rand could also move quite easily back above R7 a dollar, with a target of R7.20 and then R7.50 - but there is more of a risk that it will continue strengthening rather than weakening," she said. 

The rand was given an extra lift with the release of economic data, which showed a sharp slowdown in the price of goods leaving factory gates, a 22c decrease in the fuel price, and a sharp deceleration in domestic demand for debt by companies.

Producer price inflation, which measures the rate of increase in the price of goods leaving factories for shop shelves, slowed to an annual rate of only 0.2 percent in August, its lowest level in 23 years. It was at 1.5 percent in July.

Growth in private sector credit extension, which measures the amount of credit granted by banks to individuals and companies, moderated to an annual 16.8 percent in August from a revised 18.15 percent in July. Expectations were for 17.2 percent.

Money supply data also showed a steep moderation. M3, the broad measure of money supply, grew at an annual rate of 5.1 percent in August from a revised 7.3 percent in July and against expectations of a 7.6 percent increase.

"The numbers are positive for the interest rate outlook and we continue to expect another 1 percentage point cut in interest rates at the next monetary policy committee meeting," said Marisa Fassler, an economist at JP Morgan.

The Reserve Bank's committee meets on October 15 and 16.

Johan Rossouw, the chief economist of Vector Securities, said the probability of a cut over and above the October cut before the year-end remained high.

The stronger rand brought down stocks on the JSE Securities Exchange by more than 2.4 percent as mining companies fell despite firmer commodity prices.