The rand was firmer against the dollar in early morning trade on Tuesday due to an optimistic outlook for the euro.
"The euro has seen a relief rally on a bit of optimism but it was oversold last week and I feel it would have seen this rally anyway," a local currency dealer said. "We get so much news out of the euro zone that we've almost reached saturation point," he added.
"The danger is still that something goes badly wrong with the euro." The trader put dollar rand in an initial range of 8.30 to 8.40.
At 8.36am local time, the rand was bid at R8.3117/$ from its previous close of R8.3723/$. It was bid at R11.1101/€ from R11.1436/€ before, and at R12.9038/£ from R12.9679/£ previously. The euro was at $1.3365 from $1.3314 previously.
RMB analysts said in their morning note that while strong retail sales in the US and a growing sense of urgency among euro zone policymakers had been positive developments yesterday, there were a number of issues that posed downside risk to the outlook for the rand which warranted close monitoring.
"Japan's unemployment rate jumped to 4.5% from 4.1% on the back of slowing demand in Europe; the Governor of the Bank of England highlighted that the UK is increasingly threatened by the European crisis; the Bank of Israel cut interest rates along with a warning that the European debt crisis is spreading; Fitch ratings gave the US sovereign debt a negative outlook and Moody's is considering lowering debt ratings for European banks and S&P."
RMB said that given the lack of strong fundamental support to yesterday's rally, it expected momentum to slow. On Monday the rand gained 2% against the US dollar.
RMB added that the outcome of the finance minister's meeting in Europe should be the main driver of the local unit "but we note the release of 3Q11 GDP figures for South Africa could also have an impact."
Meanwhile, Dow Jones Newswires reported that the euro held onto its modest gains against the dollar and the yen in Asia on Tuesday, with optimism toward the euro zone debt crisis and position-squaring giving temporary support to the single currency.
Traders were focusing on a two-meeting of European finance ministers starting later in the day to see if they could flesh out plans to leverage the European Financial Stability Facility, the region's bailout fund.
In late October, euro-zone leaders agreed to leverage the €440-billion EFSF to €1 trillion as part of a comprehensive agreement to resolve the debt crisis.
"I'm wondering if we should hold out too much hope for this sort of meeting, as the outcome mostly failed to live up to expectations in the past," said Dai Sato, senior vice president of the foreign exchange division at Mizuho Corporate Bank.
Barclays Capital chief currency strategist Masafumi Yamamoto echoed skepticism over the meeting, saying Europe's debt problems were not improving at all and that they were not something that could be solved by a gathering of leaders alone.
"There is a high chance the current market optimism toward the meeting will turn to disappointment soon," he said.
Mizuho's Sato said, however, the euro might not lose much ground even if the result was not so appealing.
"As the year-end is approaching, there are players willing to respond positively to news to square short positions," Sato said. "They don't want to carry over their shorts over the Christmas and the year-end."
Speculative traders held the biggest net short euro position last week since June 2010, according to a report from the Commodity Futures Trading Commission.
