S.Africa rand hits 26-month low after dovish c.bank comments

South Africa's rand briefly hit a new 26-month low against the dollar on Thursday, and bonds trimmed losses, after a central bank statement was largely viewed as dovish but the currency stabilised in late trade after two days of hefty losses.

The South African Reserve Bank left the repo rate unchanged at 5.5 percent as expected, but highlighted the fragility of the economy's recovery and risks from the global financial crisis.

The rand hit a low of 8.34 after the bank's statement. It later steadied and was trading at 8.2650 by 1543 GMT, 0.24 percent firmer than Tuesday's New York close of 8.30, after sliding 7 percent on Wednesday as investors dumped riskier assets on doubts the U.S. Federal Reserve's latest moves would shore up the U.S. economy.

The rand has plunged nearly 20 percent in the past three weeks, hurt by unfavourable risk sentiment in global markets.

Wall Street is still down substantially, European equities are taking a big hit, and U.S. Treasuries are still rallying very hard. That's keeping the rand under pressure at this stage, said Chris Becker, analyst at ETM.

Central bank Governor Gill Marcus said the sharply weaker rand was an upside risk to inflation but it was difficult to say how long the current bout of weakness would last.

Anisha Arora, emerging market analyst at 4CAST said there was scope for further losses.

At this stage, fresh negative news could indeed spark another round of rand selloff and when the rand moves, it moves far and fast, she said, adding there could be a bit of short-term relief.

BONDS TRIM LOSSES

Bonds were weaker on the day, but trimmed losses after the central bank statement, bringing yields down from multi-week highs.

The yield on the 2015 bond was up 16 basis points at 7.03 percent, off six-week highs of 7.07 seen earlier.

The 2026 yield went up 12.5 basis points to 8.54 percent, also off two-month highs of 8.575 percent.

The market is leaning towards the side of a greater chance that there will be a rate cut rather than a rate hike, Becker said. But certainly the market ... isn't quite as convinced of a rate cut (as before).