Rand Gains Most in Week as European Union Says Debt Cuts Won't Curb Growth

South Africa’s rand gained the most in more than a week after European finance ministers said measures to curb the region’s debt crisis won’t tip the economy back into recession, boosting appetite for higher-yield assets.

The currency of Africa’s biggest economy appreciated as much as 1.4 percent to 7.4995 per dollar, the biggest gain since May 10. The rand traded 0.8 percent stronger at 7.5471 as of 4:25 p.m. in Johannesburg, from a close of 7.6077 yesterday.

The European Union will only order high-deficit countries including Spain and Portugal to make additional deficit cuts, and budgets in less-indebted nations such as Germany and Finland will remain untouched, Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels today. Markets slumped across the world yesterday on concern tight fiscal policies would hurt economic growth in the 16-member euro region.

“Risk appetite is definitely the main driver right now for all currencies” in the Europe, Middle East and Africa region, said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. It’s “doubtful” whether the improvement in demand will remain because “open questions” remain over the EU debt bailout measures, he said.

The EU last week unveiled a 750 billion-euro ($936 billion) financial aid package for indebted nations in the region, backed by European Central Bank bond purchases, to prevent a sovereign debt crisis from spreading. Analysts including Deutsche Bank AG Chief Executive Officer Josef Ackermann have expressed concern that Greece, the worst-affected EU member, won’t be able to repay its debt in full.

“Many people believe the EU plan is simply taking money out of the left pocket, and putting it into the right pocket,” said Karpowitz. “We can’t be sure this will be a success story.”

Government bonds rose in South Africa, with the benchmark 13.5 percent security due September 2015 gaining 8 cents to 123.29 rand. The yield on the bond, which moves inversely to the price, dropped by 2 basis points to 8.02 percent.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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