USD/ ZAR: Why The Value Of This Currency Is Changing

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Over the past year and a half, I’ve been writing about the things that are happening in the value of the U.S. dollar relative to the value of the South African rand.

As my colleague Jeff Brown recently wrote in a report, “U.S. Dollar Vanishes, but the South African Rand Doesn’t,” the value of the U.S. dollar relative to the rand has slipped from more than 4.25:1 to around 2:1.

Why?

Why, when the U.S. dollar is stronger than it has been in more than 30 years is the rand so weak?

The answer is that the reality is that, at least in the United States, the fundamentals of the U.S. economy have come together, the global economy has gotten stronger and U.S. stocks are once again back near their all-time highs.

These three factors have driven the U.S.

What is a “strong” currency?

Author: Abi Malin, Global Chief Economist, Euler Hermes Group

In the last decade, there has been a significant change in the valuations of currencies across the world. We may call the world in which we live a “globalized” one, and part of that process is the globalization of currencies.

Within a country, the local currency typically trades freely around its purchasing power parity, meaning it is roughly equal to a single currency across all its trading partners. In an international sense, it means the currency is sufficiently stable and trades freely on the foreign exchange market.

Nonetheless, most countries are “de-linked” from the global economy, meaning they do not have full control over the money supply.

The economic concerns in South Africa

The economic and political outlook for South Africa, a leading African country, has been negative for quite some time now.

Just like Brazil, which experienced a tough recession a few years back and is also experiencing some troubles, South Africa has also fallen into an economic slump. South Africa is a major commodity exporter and its economy is strongly influenced by global market sentiment.

South Africa is in a tough position as its economy continues to slide downwards and its currency continues to lose value against the USD. According to many economists, the USD/ZAR rate is likely to remain fairly strong in the coming months, as the economy is not in good shape.

Conclusion

It is extremely likely that South Africa will use the third reserve currency in the future.

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Article was originally on Trading View

Disclaimer: The views expressed herein are the statements of the individual authors and do not necessarily represent the views of Olaf공화 Gehrer research institute.

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About the Author

Olaf Güngör is an Associate Professor of Economics and Head of the Department of Economics at the University of Johannesburg.

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