How to explain why the South African rand keeps falling - Quartz (qz.com)
Given that South Africa operates within a flexible exchange rate regime, the value of the rand, like any commodity, is determined by the market forces of supply and demand. The demand for a currency relative to the supply will determine its value in relation to another currency. Theoretically, the demand for a floating currency—and hence its value—changes continually based on a multitude of factors. In the case of the rand, its current weakness can be attributed to a myriad of structural problems facing the local economy.

The main determinants of a currency’s value include demand for a country’s goods and services. This is closely linked to the growth and national income of its main trading partners.

Equally important is the domestic interest rate. If it is high it is likely to attract foreign capital, causing the exchange rate to strengthen. But high inflation can wipe out the benefit of high interest rates to foreign investors. Additional factors serve to drive the currency down. These include a current account deficit. The current account deficit gets bigger when a country spends more on foreign trade than it is earning and has to borrow capital from foreign sources to make up the difference. 

This implies that a country requires more foreign currency than it is getting through sales of exports, and it supplies more of its own currency than foreigners demand for its products. This excess demand for foreign currency leads to depreciation in the value of a currency.

Factors such as political instability and poor economic performance can reduce investor confidence. This inevitably forces foreign investors to seek out stable countries with strong economic performance. Thus, a country that is perceived to have positive attributes will attract investment away from countries perceived to have more political and economic risk. 

There is a further complication to currency movements. The buying and selling of currencies is no longer driven only by the need to facilitate trade but also by the demand for currencies as financial assets. This means that currencies are bought and sold like any other asset. Decisions by traders – to buy or sell a currency – can have a marked effect....continue reading...
http://qz.com/596693/how-to-explain-why-the-south-african-rand-keeps-falling/

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