Possible Short-Term Reversal in Dollar's Decline
The underlying reason for the trend reversal of the Rand is simply the unwinding of the favourable exporter leads and lags, there are a number of other factors that are beginning to feed on negative sentiment to generate a self-fulfilling prophecy. One of those is that the US Dollar, whose weakness over the past year has been seen as an important contributor to Rand strength, itself looks as if it could be embarking upon a short-term rally. One of the reasons for extended Dollar weakness has been the inexorably large US trade deficit. For several months the deficit has been running at record levels above $40bn per month, seemingly unable to contract in the wake of an ever more competitive exchange rate. This has encouraged the belief that the Dollar needed to fall significantly further still in order to have some impact in reducing the trade deficit. However, yesterday saw the release of the smallest monthly US trade deficit in more than a year, viz. $38bn. The conclusion which may be drawn is that the US's terms of trade are finally beginning to respond favourably to a falling currency and that therefore the Dollar need not have to depreciate very much further still. This news came out following a week which saw various statements made by senior government officials in Europe and members of the European Central Bank suggesting that the depreciation of the Dollar was taking place too quickly and in a manner too volatile for the good of the European economy. Allied to this there have been growing fears that the ECB will intervene to try and cap the Dollar's rise against the Euro because of the damage this trend is threatening to inflict on the Euro zone economy. This is not to say that the Dollar has reversed its downward trend from a longer term perspective. One suspects that the structural imbalances contributing towards the Dollar's decline are far more deep-seated.