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Rand Gains Versus Euro as Trichet Sees ‘Downside Risk’ to Growth

The rand advanced against the euro for a third day as European Central Bank President Jean-Claude Trichet said “downside risks” to the region’s economy have intensified. Bonds gained.

South Africa’s currency strengthened as much as 0.4 percent to 10.0034 per euro, and traded 0.3 percent stronger at 10.0108 as of 3:56 p.m. in Johannesburg.

The 17-nation euro, the currency of 45 percent of South Africa’s exports, extended declines versus the dollar and most of its peers after Trichet said inflation risks are balanced, and no longer to the upside, sparking speculation of a rate cut that would widen the rand’s yield advantage. The ECB kept its main interest rate on hold at 1.5 percent earlier.

Trichet’s comments “raised the possibility of a rate cut” to bolster the euro region, George Glynos, an analyst at Econometrix Treasury Management, said by phone from Johannesburg. “I was hoping for something more decisive from the ECB” to bolster growth, he added.

The rand retreated 0.2 percent to 7.1534 per dollar, declining for a second day, on concern Europe’s debt crisis will worsen, dimming the outlook for global growth, and before speeches by President Obama and U.S. Federal Reserve Chairman Ben S. Bernanke today.

The rand retreated as much as 0.6 percent to 7.1819 per dollar, and traded 0.2 percent down at 7.1534 at 3:57 p.m. in Johannesburg.

Bond Movement

“There is concern about the major meetings today, and a general risk-off sentiment,” John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg, said by phone.

Obama will address Congress today on a $300 billion plan that includes tax cuts and direct aid to state and local governments, while Bernanke will discuss the U.S. economic outlook.

“We’ve heard anecdotal evidence of reduced liquidity in the market, and that’s not surprising given concerns about the European banking industry and the credit crunch-like conditions in Europe,” Glynos said. “A lot of investors are seriously unsure about the direction of the market.”

Bonds advanced on expectations more monetary easing and fiscal stimulus in the U.S. will boost demand for higher-yielding fixed-interest securities, and after Business Day reported Deputy Reserve Bank Governor Lesetja Kganyago said foreign investor demand for the nation’s bonds will continue due to the nation’s relatively low debt and stable fiscal policies.

The 6.75 percent notes due 2021 climbed 82 cents to 94.64 rand, driving the yield down 13 basis points, or 0.13 percentage point, to 7.55 percent.

“Foreigners will continue to find value in relatively high-yielding local bonds,” Tradition Analytics strategists led by Quinten Bertenshaw wrote in e-mailed comments. “The fiscal risks facing South Africa are minimal compared with those facing the Western world economies.”

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