The renewed surge of the US dollar has taken its toll on virtually every global currency of note, including the South African rand. Despite economic data having become prone to near-permanent mixed signals, the explanation for the latest rally of the greenback is not difficult to find.
On 3 October, the yield on 10-year US Treasury bonds reached a 16-year high of 4.8%, before easing marginally to 4.75% on Wednesday, 4 October. This represents an increase of more than 45% over the yield that existed a mere six months ago.
In recent weeks, several key indicators in the US, such as the ISM Purchasing Managers’ Indices for services and for manufacturing, as well as an increase in job openings, pointed to stronger economic growth and the possibility of inflation remaining well above the Federal Reserve’s target of 2%. During the 2nd quarter of 2023, the US economy recorded real growth of above 2% for the 4th successive quarter.
Signs that an element of demand inflation persists in the US have prompted hawkish comments from several Federal Reserve officials, suggesting that interest rates would remain at near their current levels for an extended period and even rise again.
During September, the US dollar Index recorded its strongest monthly gain in more than a year and, as was the case in August, most currencies have taken another beating from the greenback. At the beginning of October, this index was 4.5% higher than six months ago.
Although the South African rand depreciated by 2.3% over the past nine weeks, the mean average depreciation of a representative sample of 16 key currencies was 3.2%, with the rand faring better than the Euro, the British pound, the Brazilian real and the Mexican peso.
Lower growth in several commodity exporting countries, combined with the attractiveness of US Treasury yields, have conspired to create a solid risk-off sentiment amongst a critical mass of international fund managers. At some point in time, however, US dollar strength will start hurting the country’s exporters and, as an inference, lead to balance of payments instability. This will signal the end of the dollar’s bull run.