South African rand softens as markets absorb central bank rate hike

JOHANNESBURG, Sept 25 (Reuters) - The South African rand softened in early trade on Friday as markets digested the central bank's interest rate hike, while growing expectations that the Federal Reserve will keep interest rates elevated weighed on the risk-sensitive currency.

• At 0610 GMT, the rand traded at 16.40 against the dollar , about 0.3% down from its previous close.

• The South African Reserve Bank raised its key interest rate by 25 basis points to 7.25%, saying the Iran war had triggered "large and sustained" price shocks and that tighter policy was needed to prevent higher inflation from becoming entrenched

• Governor Lesetja Kganyago said it was crucial for inflation to return to the central bank's 3% target as recent fuel-price pressures fade

• As a net fuel importer, South Africa is heavily exposed to swings in global energy prices

• The dollar was set for its first back-to-back weekly gains in more than three months, as surging Treasury yields and mounting bets on further Fed's rate hikes kept the greenback near multi-month peaks.

• Next week, domestic investors will track a raft of month-end economic data, including money supply ZAM3=ECI, private sector credit ZACRED=ECI, trade balance ZATBAL=ECI and budget balance ZABUD=ECI, as well as producer inflation ZAPPI=ECI and second-quarter formal sector employment figures

• South Africa's benchmark 2035 government bond was steady in early deals, with the yield unchanged at 8.72%.