How would the following events affect the market for South Africa's currency, the rand.

Question

A. A rise in US inflation cuases many US residents to seek to buy gold, which is a major South African export, as a hedge against inflation.

B. Major discoveries of the highest-quality diamonds ever found occur in Russia and Central Asia.

Answer 1

A:

To purchase gold from Africa people need to pay rand in exchange - thus demand for rands on international exchange market increased and consequently rand is appreciated.

B:

More diamonds exported from Russia thus less from Africa, demand for African currency falls (because it is necessary less of rands to purchase less African export) and rand depreciates.

Answer 2

Life is never quite so simple, but here goes:

A) Inflation will not only encourage people to buy gold, it will make the price of gold rise.  South Africa's exports will rise, and their balance of payments will improve. If the South African government follows sound fiscal policy, the rand will increase in value.

B) Discoveries of diamonds outside South Africa will decrease the price of diamonds. The value of South Africa's exports will decrease, and their balance of payments will decrease.  If the South African government follows sound fiscal policy, the rand will not decrease in value.

I believe the value of the Rand is more dependent on the economic policies of the South African government than the value of their exports.

The United States has a trade deficit, and I believe the value of the dollar is going to ruin based on our government's miserable economic policies, not because of the trade deficit itself.  I hope South Africa profits by our bad example and avoids our mistakes.

Grandpa