JOHANNESBURG, Sept 30 (Reuters) - South Africa's volatile rand rocketed to a three-year peak below 7/dollar on Tuesday as the greenback sagged, ringing alarm bells over the toll its strength may take on the country's flagging economy.
South Africa's bourse weakened by 2.2 percent in response to the latest surge in the robust domestic unit, which is hitting the country's exports, undermining earnings at top companies, and raising the spectre of sweeping job cuts.
"It is clearly strengthening -- I think the rand is too strong for the economy...this is not a comfortable exchange rate for the economy," CSFB economist Peter Worthington said.
The rand bolted by 3.6 percent to 6.87/dollar as the U.S. currency slid to three-year lows versus the yen and a three-month trough against the euro, the currency of South Africa's main trading partner.
This took its gains against the broadly weaker dollar this year to nearly 25 percent, ahead of both the Brazilian real and Turkish lira -- making it the world's best-performing currency so far in 2003, a distinction it also earned in 2002.
On a trade-weighted basis, the rand has appreciated by a more modest 16 percent, according to data from the central bank.
Analysts said the unit was now targeting 6.80/dollar. If that level broke, it could quickly race to 6.045/dollar.
"If it breaks 6.80, it will fall off a cliff," said Bank of America's emerging market analyst Callum Henderson, meaning that the rand may firm even further against the greenback, which is being undermined by doubts about the U.S. economy.
RATE CUTS LOOM
The rand's gains have helped spur falls in domestic inflation and make more interest rate cuts look inevitable, after the central bank already slashed its key repo rate by 350 basis points to 10 percent so far this year.
But debate is swirling over whether this will be enough to boost sluggish economic growth and create more jobs -- a burning issue in a country with a jobless rate of more than 30 percent.
Growth braked to 1.5 percent in the first half of 2003 from 3.0 percent last year while exports -- which account for about a third of South Africa's gross domestic product -- contracted sharply, partly because of the global slowdown.
A string of top blue-chips -- including South Africa's biggest firm Anglo American <AAL.L> <AGLJ.J> and the world's second-largest platinum miner Impala Platinum <IMPJ.J> -- have already warned the rand's strength is eroding their profits.
A number of others have also said they may have to cut jobs if the trend holds. Most of South Africa's top companies are resource-based, which means their dollar-denominated export income shrinks when converted into a stronger rand.
Data on Tuesday showed that the robust rand was eroding exports, with the trade surplus narrowing to 1.4 billion rand ($199.8 million) in August from 2.85 billion rand in July.
Most of the unit's gains this year have been fuelled by the appeal of South Africa's high interest rates to yield-seeking foreign investors, but a surge in gold and platinum prices -- which are key exports -- has also helped.
Expectations that interest rate cuts would dampen appetite for the rand have not been met yet, and fresh data sealing the case for lower rates also failed to unseat its rally on Tuesday.
Statistics South Africa said producer prices rose 0.2 percent in the year to August -- their slowest for at least 30 years. In the same month, growth in the broad measure of money supply slowed to 5.09 percent, its lowest since 1993.
Analysts said this made a one percentage point rate cut at the central bank's next policy meeting in mid-October look inevitable, with yet another possible by year-end. This did nothing to dampen enthusiasm for the country's currency.
(Reporting by Mariam Isa, editing by Will Hardie; Reuters Messaging [email protected] +27-11-775-3151, fax: +27-11-775-3132, e-mail: [email protected]))
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