Q. Why when the FED raises interest rates does the rand weaken?A. Whenever you think about a country raising interest rates, we need to consider what happens to investors and where they are more likely to deposit their money.
So, as we are expecting an increase in interest rates this month from the FED, there are a few reasons why we can expect the rand to weaken further:
Here are three to consider…
Reason #1: Investors flock to the US Dollar
When the US Federal Reserve raises interest rates, it becomes more attractive for investors to hold or buy US-dollar denominated assets.
That’s because they know they’ll receive a higher rate when they invest in it.
This will also lead to a rise in the US dollar and a drop in smaller currencies (like the rand).
Reason #2: US Dollar is still the fat cat of reserve currencies
A rise in US interest rates may lead to higher borrowing costs globally.
This is because the US dollar is still the world's primary reserve currency.
When we think of gold, Bitcoin and other precious metals, we think of how it’s priced in US dollars.
The problem with this, is that emerging market countries, like South Africa, will
face higher debt-servicing costs as the US interest rates continue to move up.
And this could continue to put pressure on their economies which will lead to a depreciation in the rand.
Reason #3: South Africa is still a big exporter
Also, South Africa remains one of the major exporters of commodities.
And the value of the rand is linked to fluctuations in commodity prices.
So, when US interest rates rise, this leads to a stronger US dollar. And can
cause commodity prices to drop (as they are generally priced in US dollars).
As South Africa is a major commodity exporter, the lower commodity prices would have a negative impact in SA’s export revenue – which can in turn weaken the rand further.
