Tuesday, November 09, 2010

South African Rand is at 3 year high to the dollar - is this good or bad?

, On Tuesday November 9, 2010, 1:26 am EST
JOHANNESBURG (AP) -- South Africa's currency is trading at an almost three-year high against the U.S. dollar, raising concerns about how strong is too strong.

That puts it in a similar category as several other countries, such as Japan, that are wrestling with a soaring currency. But South Africa finds itself in a unique position: While the government is under pressure to rein in the strengthening currency because it is hampering exports and perpetuating unemployment, the strong currency is also pushing economic growth in one of Africa's biggest economies.

South Africa's peculiar situation comes as currency issues move to the forefront of global debates about the balance of trade, with some observers raising the prospect of "currency wars."
For South Africa, the debate seesaws between those who seek action to tame the rand and those who see the strong currency as a blessing.

So far South Africa's all-important gold companies are weathering the currency surge thanks to inflated commodity prices. And the rand isn't showing signs of slowing -- a healthy sign for South Africa, said Christopher Hart, the chief economist of Investment Solutions.

"In the last 10 years, when the rand has strengthened, we've experienced higher economic growth and lower inflation," said Hart, adding that a stronger currency also helps to attract skills.
A strengthened currency does hurt exporters, but many exporters also import so the effects are tempered. Imports can be bought cheaply when the rand is strong, said Ebrahim-Khalil Hassen, an independent South African economist.

For South African farmers, most of the big-ticket equipment such as tractors and hay machinery are imported, so a strengthened rand is beneficial, said Dr. Jim Rankin, secretary of a South African agricultural machinery trade association.

Additionally, South Africa, hoping to continue drawing foreign tourists long after the World Cup, may not be hindered by the strengthened currency because it reduces the cost of getting to South Africa in terms of airfares, Hart said.

SHOOT: In general, it's good news, especially if you are already employed.  At a time when inflation is a problem worldwide, it won't be a problem here.  That said, exporters will be hurt, including local car manufacturers that are often geared exclusively towards exports.  If South Africa can respond effectively, and lower costs of production, we can be more competitive, but the caveat is labor, and if anything, local labor costs are going up.  One word of warning,  the massive currency inflows which have the USA's quantitative easing [QE2] as source, can precipitate a contagion effect were the dollar to collapse entirely. 

Read more here.

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