JOHANNESBURG: South Africa's rand rallied to a 3-1/2 month high against the US dollar on Wednesday and government bonds firmed after Federal Reserve chair Janet Yellen said the U.S. central bank should be cautious in raising interest rates.
The rand has been under pressure since Dec. 9 after President Jacob Zuma fired respected finance minister Nhlanhla Nene and replaced him with an unknown backbencher, triggering a dramatic sell-off in the currency.
Although Zuma rescinded his decision within a few days, returning Pravin Gordhan, also liked by investors, to the finance minister post, investors are now worried about undue political interference in key economic departments.
Despite Wednesday's gains, which left the rand at its strongest since mid December, it was still far off the 14.6000 level it closed at the day before Nene's sacking.
At 0839 GMT, the rand traded at 14.9765 per dollar, 1.21 percent firmer than Tuesday's New York close. It briefly scaled a high of 14.9010 earlier on Wednesday.
"Emerging markets currencies across the spectrum have strengthened into the London open. This follows on from Fed chair Yellen comments which have been interpreted as rather dovish," ETM Analytics economist Jana van Deventer said.
"Markets are scaling back expectations for the Fed to hike interest rates as soon as April and the Fed rate hike trajectory is being lowered."
Government bonds also firmed, and the yield for the benchmark government bond due in 2026 slid 17.5 basis points to 9.17 percent.
The Top-40 stock index was up 1.26 percent while the broader all-share rose by 1.3 percent.
Locally, focus was on whether Gordhan would answer questions from the elite Hawks police unit about a suspected spy unit established while he was head of the South African Revenue Service (SARS).
"If there are any difficulties surrounding this topic then we could see the rand give back some of the gains," van Deventer said. The Treasury did not immediately respond to Reuters questions on the issue.
Analysts said another risk for the rand was South Africa's Constitutional Court ruling on Thursday on whether Zuma should pay back some of the 240 million rand ($16 million) spent by the state on renovating his private Nkandla home.
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