The rand fell by nearly 1% yesterday on the back of the US dollar extending its strength for a third day in a row after some US Federal Reserve (Fed) policymakers left the door open to further rate hikes.

The markets were gripped by tension yesterday as investors awaited clues on the outlook of interest rates from a slew of central bank officials, including a speech from the US Fed chair Jerome Powell on the central bank's future policy path in the evening.

The sentiment across the market has been that the Fed will increase rates one last time before the year end by at least 25 basis points, which drove a sell-on to the greenback.

As a result, the rand 0.8% to R18.50/$1 by 5pm, weaker than Tuesday’s close of R18.34/$1.

ActivTrades senior analyst Ricardo Evangelista said the dollar hedged up in early trading and continued to recover the ground lost to other major currencies at the end of last week.

Evangelista said that after last week’s dovish Fed stance and a disappointing jobs report, which saw the dollar touching a multi-week low, Fed officials had been working hard to reset expectations, talking tough and re-opening the door for further rate hikes.

“With inflation still far from the Fed’s 2% target, the last thing Jerome Powell and his peers want is a slump of the dollar and the complete unwinding of the tight financial conditions that allowed the Fed to pause earlier than many expected,” he said.

“Powell is scheduled to speak in public, and, should he choose also to adopt a hawkish tone, the occasion may lead to further dollar gains.”

The weakness of the rand has been one of the contributing factors to higher fuel prices in South Africa, which have in turn contributed to a high consumer price inflation (CPI) environment for more than a year.

However, Investec chief economist Annabel Bishop yesterday said a fuel price cut was building of R1.31/litre for petrol and R1.85/litre for diesel for December, mainly due to lower international petroleum product and oil prices.

Bishop said the rand’s recent strength against the dollar had a lesser effect on these developments.

She said international agricultural food commodity prices rose in October and were priced in US dollars, but the rand saw very little change against the US dollar on average for October, versus September.

These factors, according to Bishop, would both add to food price pressure in October, and to the overall outcome for CPI inflation in South Africa in October, which Investec thought would remain around the elevated levels of September’s 5.4% year-on-year.

“The rand is still stronger than in October, but nearer R18.50/$1 today, modestly weaker than its close of yesterday at R18.34/$1 as some of the exuberance post the Federal Open Market Committee meeting dims, while demand concerns have weakened oil prices,” Bishop said.

“Expectations are for lower inflation in 2024, at an average of 4.6% year-on-year versus 2023 5.8% year-on-year, risks remain to this outlook, both from the weather and global events, while inflation in SA continues to see high-cost pressures from administered prices.

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