South Africa's rand at late May highs as Fed move boosts emerging markets

A South African child holds a 50 rand note July 2. The rand sank to a fresh low against the dollar i..
A South African child holds a 50 rand note in a file photo.

JOHANNESBURG (Reuters) - South Africa's rand traded near four-month highs against the dollar on Thursday, buoyed like other emerging market currencies by an unexpected U.S. Federal Reserve decision to maintain its asset-buying programme at current levels.

Government bond yields slumped as much as 26 basis points from Wednesday's closing levels as the Fed move triggered renewed demand for local debt, which offers much higher returns for investors than those in developed markets.

The heavily traded 2026 benchmark fell to 7.895 percent, a level last seen in late July, while the shorter-dated 2015 paper shed 23 basis points to 5.83 percent.

By 0630 GMT the rand was at 9.5660 to the dollar, up 0.32 percent from Wednesday's close at 9.5970 in New York.

The rand soared more than 2 percent overnight, the most it has gained in a day since September 6, after the U.S. central bank said it would continue injecting $85 billion a month into the financial system through bond purchases, a key source of flows into high-yielding emerging markets.

"We are already seeing demand from importers at these levels but any retracements towards 9.62 should be met by offers," said Standard Bank trader Jan de Fouw.

However, a close above 9.6800 for dollar/rand should stall the greenback sell-off for now, he added.

The latest rand rally has whittled its year-to-date losses against the dollar to 13 percent from 19 percent a few weeks ago and should allay South African policymakers' concerns about rising imported price pressures.

Economists and traders expect the Reserve Bank to keep interest rates four-decade lows of 5.0 percent when it concludes its fifth policy meeting of the year on Thursday, in spite of inflation breaching the top of a 3-6 percent target band.