Bloomberg News

Rand Leads Drop in Major Currencies on Renewed EU Debt Concern

October 11, 2011

Oct. 11 (Bloomberg) -- The rand led a drop among major currencies against the dollar after European Central Bank President Jean-Claude Trichet said the debt crisis threatens the financial system, sapping demand for riskier assets.

South Africa’s currency retreated 1.5 percent to 7.9615 by 3:27 p.m. in Johannesburg, the most out of 16 major currencies monitored by Bloomberg. Against the euro, it slipped 1 percent to 10.8191.

Europe’s debt crisis has reached a “systemic dimension,” Trichet told European lawmakers in Brussels today as Slovakia, the only country in the region that hasn’t ratified the retooled bailout fund, prepared to vote on the package. South Africa’s stock index reversed gains and commodity prices fell for the first day in five. South African bond yields rose.

“Those were quite grave opinions from Trichet, and they brought home the realization that the fundamental challenges are not really being addressed,” Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Capital, a unit of South Africa’s fourth-biggest bank, said by phone. “Risk appetite is being downgraded, we start losing global investment flows, and the rand has to weaken.”

European officials are toiling to meet an end-of-month deadline set by French President Nicolas Sarkozy to get to grips with the crisis, which has propelled Greece to the brink of default, shaken world markets and fueled speculation that the 17-nation currency might not survive in its current form.

Greece Loan

The rand remained weaker after EU and International Monetary Fund officials indicated Greece will get an 8 billion- euro ($11 billion) loan next month under a 110 billion-euro bailout. Sarkozy and German Chancellor Angela Merkel said at the weekend they will unveil plans to recapitalize the region’s banks by the month’s end.

“While recent assurances have provided hope of a resolution to the debt debacle, there are still signs of banking sector stress,” John Cairns and Nema Ramkhelawan-Bhana, currency strategists at Rand Merchant Bank in Johannesburg, said in a research note.

The South African currency extended declines on concern China’s decision to buy shares in four banks may be a sign lenders in the world’s second-biggest economy are also facing funding problems, Nedbank’s Cruickshanks said.

“Why is China adding capital to its banks? Because they need it,” he said. “It is a symptom of the worldwide funding shortage.”

Bonds declined for the first day in six on concern the weaker rand will fuel inflation, leaving the central bank less room to cut interest rates. South African 10-year bond yields added nine basis points, or 0.09 percentage point, to 8.10 percent.

Forward-rate agreements starting in March, which investors use to lock in borrowing costs, climbed four basis points to 5.29 percent.

--Editors: Ana Monteiro, Tim Farrand

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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