US rate cut helps rand keep in shape
September 19, 2007
By Jacqueline Mackenzie
Johannesburg - The rand was sharply firmer in early trade on Wednesday as the US dollar hit a lifetime low against the euro after the US Federal Reserve cut rates by 50 basis points overnight.
By 8.50am the rand was bid at R7.0673 per dollar from its overnight close of R7.0918 and compared with R7.1747 at around 6.30pm on Tuesday. It was bid at R9.8888 to the euro from a previous R9.9189 and at R14.2472 against sterling from R14.2720 before.
The euro was bid at $1.3983 from $1.3978 overnight, while gold was quoted at $724.65 a troy ounce from its previous close of $724.05.
DJ News reports that Federal Reserve sliced a half a percentage point from its benchmark lending rates to counteract the effects of credit market woes on the US economy.
A cut by the Federal Open Market Committee was widely expected, but an unanimously voted 50-basis-point reduction was at the high end of currency analyst's expectations and caught some off guard.
The result was a spike higher for the euro to an intraday top at $1.3983, the single currency's peak level since its introduction in January 1999.
"It's broadly negative for the dollar because of the lower interest rates and the outlook for rate differentials," said Rebecca Patterson, global currency strategist at JPMorgan.
ETM analysts said in their morning report that in the past week investors had been downscaling their expectations for a US rate cut believing that 50bp would be too bold a move. One also believed that a 50bp cut might send the wrong message to the market and that the more cautious approach would have been better.
"Clearly this was not the thinking of the FOMC who did indeed decide to drop rates by a full 50bp to take the Fed funds rate back down to 4.75%. The consequences of this were massive and had a particularly strong effect on currencies," they said.
In response, US equity markets surged by well over two percent, which will no doubt help risk aversion levels evaporate. This is certainly reflected in the VIX which plummeted by a staggering 23.15% to take the index back down to levels last seen on July 25, they noted.
"Expectations that the spread between domestic and US rates will widen significantly will boost the prospect of the US dollar versus rand sinking back below the 7.00 handle. This in itself should promote a reversal of rate hike expectations and should prove positive for bonds," they added.
A local currency trader put the rand's range at R7.03 to R7.12 on Wednesday.
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