Nineteen years ago, one US dollar cost R0.88. By 1985 the same dollar cost
R2.22 and by the beginning of last year you were paying more than R6. This
week, you were lucky if you could get a dollar for just over R7.
When you need more rands to buy a dollar, you can say that the rand has
depreciated against the dollar. Alternatively you could say that the dollar
has strengthened against the rand.
Andre Roux, from the Stellenbosch University`s Graduate School of Business,
in his book Everyone`s Guide to the South African Economy, says that if
South Africans want to buy more dollars than they can sell during any given
period, dollars become relatively scarce.
When a commodity becomes scarcer, the price increases. So, if that scarce
commodity is the US dollar, its price, in rand terms will go up.
South Africans buy dollars when they want to pay for goods or services from
the United States. So, before you can buy a consignment of cornflakes for
say, $1 000 from an American breakfast food manufacturer, you must buy
dollars from a registered foreign exchange dealer.
Most of the larger bank branches or the South African Reserve Bank are
registered dealers.
Similarly, American citizens buy rands in order to purchase goods from
South Africa.
If the total outflow of dollars is greater than the inflow (demand for
dollars exceeds supply), the dollar becomes more expensive and the rand
cost of dollars rises - the rand depreciates.
If supply of dollars exceeds demand, on the other hand, the dollar becomes
cheaper. Fewer rands are needed to buy one dollar which means that the rand
appreciates.
Other factors which influence the value of the rand include:
Inflation
The wider the gap between our inflation rate and that of America, the
greater the pressure will be for the rand to depreciate against the dollar.
This is because more rapidly rising prices in South Africa will make our
exports less competitive and reduce the demand for rands.
In the unlikely event of the US inflation rate being consistently higher
than ours, the rand should strengthen against the dollar, Roux says.
Monetary Policy
Most of the foreign currency earned from selling locally produced goods in
South Africa is used to buy goods abroad that South African producers are
unwilling or unable to produce.
When South Africa goes through a period of prosperity, demand for goods
rises and imports of machinery and equipment grow.
So, when domestic spending rises so do imports. On the other hand, a fall
in domestic spending is accompanied by a decline in imports.
A tightening in monetary policy, with higher interest rates, slows down
demand for goods and services and consequently for imports.
When monetary policy is relaxed - that is, interest rates are lowered - and
domestic spending picks up once again, imports follow suit and the demand
for dollars rises to pay for imports. As a result, the rand will depreciate
against the dollar.
So, relatively high interest rates cause the rand to appreciate, or at
least prevent it from depreciating any further; while relatively lower
interest rates have the opposite effect.
The Gold Price
Gold is priced in US dollars, so as the gold price rises, our gold mines
obviously earn more dollars. This inflow of dollars leads to an improvement
in the value of the rand against the US dollar. When the gold price falls
significantly, the inflow of dollars to South Africa decreases.
The Dollar
Although the US dollar often goes through periods of weakness, it is
probably still the most important and sought-after international currency.
On occasion the rest of the world loses faith in the dollar for a few
months, often reflecting a loss of confidence in the future of the US
economy.
When this happens, the dollar depreciates against all the important
currencies in the world and sometimes also against the rand.
Conversely, when the rest of the world regains faith in the US economy, the
opposite happens and the rand depreciates against the dollar.
The Role of the SA Reserve Bank
The exchange rate at any moment is the net result of a number of different
forces. For example, the simple fact that our export revenue rises faster
than our import payments in a particular period does not necessarily mean
that the rand will appreciate.
South Africa`s debt repayments in that period may be so large as to
neutralise the inflow of dollars resulting from the higher exports and the
rand will then actually depreciate. Remember, that to repay debt the South
African debtor has to acquire dollars.
From time to time the Reserve Bank may choose to influence the rand
exchange rate by using some of its reserves.
South Africa`s foreign exchange reserves, held by the Reserve Bank, consist
of gold and a stock of foreign currency, mainly US dollars.
If the Reserve Bank feels that the rand is depreciating too drastically and
it wants to curb such a depreciation, it could sell some of its dollars on
the market. The increased availability of dollars makes them cheaper so
this intervention by the Reserve Bank in the foreign exchange market helps
to prevent the rand from depreciating any further.
Naturally the Reserve Bank cannot sell dollars indefinitely as it cannot
allow the stock of dollars to fall too much.
On other occasions the Reserve Bank may feel it necessary to prevent the
rand from appreciating, in which case it will buy dollars.