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Currency Exchange: The South African rand defies logic

Posted June 2, 2008

“Can a currency really plummet in value, even while its central bank is raising interest rates? Yes, it can. In fact, it’s happening in South Africa right now.” — Sean Hyman

by Sean Hyman

Baltimore – (TFN): In the world of currency exchange, a currency tends to drop in value when its country is cutting interest rates (for example: the dollar plummeted over the last year as the Fed slashed rates to the bone). The reverse is also true: Currencies tend to appreciate when their central banks raise rates.

The reason: Currency traders want a higher yield on their investment, so they search for currencies with higher yields, and abandon the currencies with lower yields. When they buy higher-yielding currencies, they push the currencies up in value, and vice versa.

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But is that always how it works? Or can a currency really plummet in value, even while its central bank is raising interest rates?

Yes, it can. In fact, it’s happening in South Africa right now. The central bank is hiking rates, yet the South African rand (ZAR) is dropping. Read on to learn why.

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Posted by Sean Hyman · Filed Under International Investing 

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