Rising energy costs and a weaker currency are upside risks for inflation, offsetting the effect on prices from lower growth in Europe as a result of the debt crisis, the central bank said in its twice-yearly Monetary Policy Review yesterday. A report today may show South Africa's consumer inflation rate rose to
5.9 percent in October, from 5.7 percent the previous month, according to the median estimate of 18 economists in a Bloomberg survey.

"Any upside surprises could support the rand from a yield differential perspective, as hopes for an interest-rate cut in the New Year might fade," Michael Keenan, a Johannesburg-based analyst at Standard Bank Group Ltd., and colleagues wrote in e- mailed comments. "However, such an outcome would, at best, only stem further rand depreciation rather than encourage appreciation."

Eoin Treacy's view As commodity prices pullback, inflationary pressures in many countries should moderate. A number of countries have already moved to lower interest rates and more are likely to follow suit. Therefore, interest rate differentials are likely to contract. In addition to the liquidity of the Dollar, these factors help to explain its renewed strength against the majority of currencies.

The US Dollar found support in the region of the 200-day MA against the vast majority of currencies this month and has rallied impressively. In most cases the MA has turned upwards. Viewed over a 5-year basis the Dollar is rallying from a relatively depressed level. One might argue that there are valid reasons the Dollar was so weak, not least concerted US government policy. However, the greenback is liquid and the USA is not currently the focus of investor anxiety. It will probably give at least part of its recent advance if sentiment, which is currently absurdly bearish, begins to recovery.

In the meantime, sustained moves below its 200-day MA against the majority of currencies would be required to question current scope for additional upside.