The rand strengthened by 0.7% to R18.78 against the US dollar at 5pm today after a key US inflation report showed consumer prices rose slightly more than expected in the world's biggest economy.
The annual inflation rate in the US rose for a third consecutive month to 2.9% in December 2024, up from 2.7% in November, in line with market expectations, partly driven by low base effects from last year, particularly for energy.
The latest data points to still elevated consumer inflation, strengthening the case for the US Federal Reserve’s cautious stance on interest rates amid concerns in the markets about incoming US President Donald Trump’s policies on tariffs.
Incoming US tariffs are expected to have a dampening effect on global trade, although reports are now that they could be less severe on implementation.
However, the US is reported to have seen Trump’s economic team discuss less severe tariffs, only covering critical imports, as opposed to a blanket approach.
Economists believe that the former would have less of a price, and so growth shock, and market sentiment has improved as a result, reducing safe haven flows somewhat and so weakening the US dollar.
The dollar last traded about 0.45% weaker against a basket of currencies.
Investec chief economist, Annabel Bishop, said the sectors seen as still necessary for US tariff increases were highlighted as those critical to national or economic security.
Bishop said a universal tariff was not off the cards either, and markets were adopting a wait and see approach.
“Should the tariff changes eventually adopted prove modest, there is scope for further US dollar weakness, and so further rand strength against the US dollar, if the tightening in trade restrictions prove less onerous than feared,” she said.
“The potential still for higher tariffs on China, Canada and Mexico also persist, with the US’s incoming President having included illegal immigration, drug trafficking and other specific concerns.
“With concerns over the economic effects of substantial tariff increases in the US as early as later this month, the possibility of a much more moderate and weaker rise in tariff restrictions has been received very positively by financial markets.
“It should be noted though that while concerns have been high on the severity of the tariffs to be imposed on US imports, there has not been actual formal agreement to proceed with a less severe tariff regime, and so the rand is at risk of further volatility.”
BUSINESS REPORT