Finweek English Edition - - COMPANIES & INVESTMENTS - Garth The­unis­sen

The US dol­lar could be on the verge of a long-term rally driven by in­creas­ing signs that a re­cov­ery is tak­ing hold in the world’s big­gest econ­omy. An­a­lysts say that could af­fect com­mod­ity-backed, emerg­ing-mar­ket cur­ren­cies l ike the rand in both pos­i­tive and neg­a­tive ways.

“Our view is that the dol­lar rally is only just be­gin­ning,” says Alvin Tan, a Lon­don-based for­eign-ex­change strate­gist at So­ciété Générale (SocGen). “The US econ­omy is f in­ally re­cov­er­ing and that will sup­port the dol­lar. On t he other side t he prob­lems with the euro and more, and con­tin­ued mon­e­tary loos­en­ing in Ja­pan will fur­ther sup­port the green­back.”

Al­ready the Dol­lar In­dex, which tracks the value of the green­back against the cur­ren­cies of six US trad­ing part­ners, is trad­ing near the high­est in seven and half months on in­creas­ing signs of US eco­nomic re­cov­ery. Per­haps the big­gest pos­i­tive out of the US is the im­prove­ment in the hous­ing mar­ket with Com­merce De­part­ment data show­ing that new home purc hases c l i mbed t o $437 000 in Jan­uary, the high­est level since 2008. Bank of Amer­ica has also es­ti­mated that US home prices will rise about 8% this year, a big fac­tor in an econ­omy where con­sumers ac­count for about two-thirds of GDP.

“US data is clearly look­ing more en­cour­ag­ing and that is sup­port­ive of the dol­lar,” says Mal­colm Charles, a bond port­fo­lio man­ager at In­vestec As­set Man­age­ment i n Cape Town. “The ro­bust­ness of the re­cov­ery seems to be a lot bet­ter than it has in re­cent years.”

So good are the signs that none other than Bill Gross, the co-chief in­vest­ment of­fi­cer of Pa­cific In­vest­ment Man­age­ment Co ( Pimco), the world’s big­gest bond fund, dou­bled his forecast for US growth this year to 3%. That’s up from a De­cem­ber forecast that gross domestic prod­uct was likely to ex­pand be­tween 1.25% and 1.75% in 2013. While it’s a big call con­sid­er­ing the me­dian forecast of econ­o­mists sur­veyed by global data provider Bloomberg is 1.8% growth in the US econ­omy t h i s y e a r, the fact re­mains t hat when

Pi mco talks, peo­ple l i sten. With the dol­lar hav­ing a l r e a dy a dvanced from $1.36 per euro on 1 Fe­bru­ary to $1.2996 at the time of writ­ing, SocGen is now call­ing for the green­back to reach $1.20 to the euro by year-end as eu­ro­zone debt woes con­tinue. The French bank is also call­ing for the dol­lar to ad­vance to 100 yen by end-2013 (from 96.18 cur­rently) and 1.06 Swiss francs (com­pared with 0.95 now).

How­ever, for most South Africans it’s the dol­lar’s ef­fect on the rand that counts. A re­cov­er­ing dol­lar could fur­ther hurt the rand, al­ready the worst per­form­ing emerg­ing-mar­ket cur­rency in 2013, as it un­der­mines the price of SA’s com­mod­ity ex­ports, which are priced in dol­lars.

“The rand is al­ready suf­fer­ing from SA’s neg­a­tive fun­da­men­tals such as the strikes, slower growth and the mas­sive cur­rent ac­count deficit,” says Brigid Tay­lor, a cur­rency an­a­lyst at Ned­bank. “If SA suf­fers an­other sov­er­eign down­grade it won’t be pretty for the rand.”

Tay­lor ex­pects the rand to av­er­age be­tween R9.08 and R9.20 per dol­lar in 2013 but says the lo­cal cur­rency could eas­ily slide to as weak as R9.80. But while a stronger dol­lar could un­der­mine the value of the rand in the short term, a re­cov­er­ing US econ­omy could also buoy the cur­rency over time.

“A st ronger US i s ver y good for emerg­ing mar­kets as an as­set class,” says Charles. “A stronger dol­lar could un­der­mine f lows into SA’s bond mar­ket but the im­prove­ment in risk sen­ti­ment that would come from a US re­cov­ery could see a re­sump­tion of f lows into our eq­uity mar­ket, which may be rand sup­port­ive over time.”

Dol­lar In­dex Spot

For­eign in­vestors were net sellers of over R4bn i n SA eq­ui­ties l ast year, though inf lows into the bond mar­ket to­talled R87.8bn.

Charles says while the rand is prob­a­bly at “fair value” at its cur­rent level of R9.18 per dol­lar, In­vestec ex­pects it to trade be­tween R8.75 and R9.25 over the next six months.

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