Rand breaks R16 barrier as US rate hike hopes fade

Johannesburg – The South African rand strengthened beyond the closely watched R16-to-the-dollar level on Thursday after comments from US Federal Reserve Governor Christopher Waller eased expectations that the US central bank could raise interest rates this month.

The rand broke below R16 against the US dollar as investors responded to Waller’s more cautious stance on monetary policy.

Waller said he could support keeping interest rates unchanged at the Federal Reserve’s September meeting if incoming inflation data confirms that price pressures are continuing to ease.

Speaking at a Reuters event, Waller urged policymakers to “give disinflation a chance”, signalling that the Fed should avoid rushing into another rate increase while inflation shows signs of moderation.

His comments prompted a sharp shift in financial-market expectations.

Additional support 

Reuters reported that the probability of a US rate hike at the September meeting fell to about 50%, from 63.2% earlier, while US Treasury yields also declined.

The weaker dollar provided additional support for emerging-market currencies such as the rand.

The currency briefly traded as low as about R15.97/$ during Thursday’s session, although it later moved back towards the R16 level.

The move comes after the rand had come under pressure earlier in the week following hawkish comments from US Federal Reserve Chair Kevin Warsh.

The currency had weakened to around R16.16/$ as expectations of a US rate hike increased, with analysts pointing to stronger demand for the dollar and heightened geopolitical risks.

Rapidly changing US monetary-policy outlook

The latest rally therefore reflects a rapidly changing US monetary-policy outlook. Higher US interest rates generally support the dollar by making dollar-denominated assets more attractive, while expectations of stable or lower rates can encourage investors to seek higher returns in emerging markets.

However, risks remain for the rand. Rising oil prices linked to the continuing Middle East conflict could fuel inflation and complicate monetary-policy decisions in both the US and South Africa. Trading Economics reported that the rand remained around R16.1/$ amid concerns over higher oil prices and geopolitical tensions, despite its broader resilience.

For South African consumers and businesses, a sustained rand below R16/$ could help reduce the cost of imported goods and ease some pressure from dollar-denominated costs. But analysts are likely to remain cautious because the currency remains highly sensitive to movements in the US dollar, global interest rates, commodity prices and geopolitical developments.