THE rand has entered the new year on a firmer note after its biggest yearly gain versus the dollar since 2003, capitalising on its high-yielding status.
The gain helped propel local equities to their highest level in three years, with the JSE all share index up 29% for the year.
Analysts say its rise could also signal an interest-rate cut in the first quarter.
The rand's strength highlights the extent to which the currency is being driven by the carry trade, with investors borrowing cheaply and investing in high-yielding currencies, typically those of emerging markets, in an attempt to benefit from the differences in interest rates.
However, continued rand strength in the new year could weigh heavily on SA's economic recovery, analysts have warned.
Beat Siegenthaler, chief emerging-market strategist at TD Securities, said the rand outperformed, along with other emerging-market currencies, in large part because of its significant yield advantage.
"Higher commodity prices, especially for gold and platinum, have also helped."
The local currency gained 0,2% to R7,3776 to the dollar by 12pm on Thursday, capping a 27% gain from R9,4125/ at the end of 2008. On Wednesday, it traded at R7,38/ in the after session. The market was closed on Friday for the public holiday.
Last year, the rand surged to second-best performer after Brazil's real as record-low interest rates in the US encouraged investors to borrow in dollars and invest the money in countries with higher returns.
The rand posted its biggest annual gain since 2003 as record- low interest rates in developed nations encouraged purchases of high-yield assets and as commodity prices rose on signs of a global economic recovery.
High precious metals prices, benefiting from signs of a global economic recovery, also lifted the rand. Gold, which along with platinum accounts for about 22% of domestic exports, gained 26% last year. Platinum surged 56%.
On the JSE, resource shares led the rally with the resources index gaining 0,67%, gold producers 2,03% and platinum miners 1,11%. Anglo American climbed 99c to R319,49 and BHP Billiton added 50c to R237. ArcelorMittal rose R1,55 to R103.
Paul Peter, a trader at Citigroup, said gains in the rand might prompt the Reserve Bank to lower its main interest rate by as much as one percentage point in the first quarter this year to weaken the currency and boost the economy.
The rand might need to weaken to "between eight and nine" to the dollar to make SA's exports more attractive, Peter said.
"The economy is sick, and the logical tool to fix that would be lower interest rates and a weaker currency," he said.
"The rand has to weaken to stimulate the economy."
The Reserve Bank reported on Thursday that credit in SA contracted in November for the second time in 43 years as job losses drove consumers to cut spending and banks reduced lending.
"The credit numbers show that this economy is struggling to recover," said Natheem Alexander of Peregrine Quant. "The number is definitely supportive of further rate cuts."
John Cairns, currency strategist at Rand Merchant Bank, said in a recent research report he expected that high-yielding currencies, and particularly the rand, would continue to be driven by growing risk appetite.
RMB's provisional forecast saw the local currency as likely to remain significantly stronger in the first half at about R7,25/ and to weaken gradually to about R8/ for the year-end, Cairns said.
Currency analysts expect the dollar to gain more ground against the euro in the short term, sparking further depreciation of emerging-market currencies, especially the rand and the Brazilian real.
They also say the carry trade might, when it starts unwinding, threaten the global economy. With Bloomberg