Rand hits R18 to the US dollar as Trump’s tariffs loom

The rand has weakened significantly as the world anticipates the implementation of United States tariffs on several countries, including South Africa, from the start of August.

This weakening in the local currency also comes as the South African Reserve Bank’s Monetary Policy Committee (MPC) prepares to vote on whether to hold or cut the country’s interest rates.

This decision is set to be announced later on Thursday, with expert predictions leaning towards another 25 basis point cut.

The MPC’s vote follows the United States Federal Reserve’s announcement of its interest rate decision on Wednesday, 30 July.

The Fed’s Federal Open Market Committee (FOMC) voted to keep the United States’ interest rates steady, citing uncertainty amid US President Donald Trump’s looming tariffs.

These tariffs, which will be imposed on countries around the world at rates as high as 50%, are expected to drive up inflation in the United States, explaining the Fed’s cautious approach.

Fed chair Jerome Powell said the United States economy remains strong, with low unemployment and the labour market at or near maximum employment.

However, he noted that government policies continue to evolve, and their economic impact remains uncertain.

“Higher tariffs have begun to show through more clearly to the prices of some goods, but their overall effects on economic activity and inflation remain to be seen,” he said.

Investec chief economist Annabel Bishop explained that, so far, an easing in services inflation has been countered by a very modest rise in goods prices.

This is because tariffs introduced this year that are still in place have had a modest effect on some categories of goods.

Regardless of the exact impact of tariffs on US inflation, the Fed is expected to remain highly cautious. Market expectations for the chance of any US interest rate cut occurring this year are dropping.

The Fed highlighted that its decision to keep rates unchanged is linked to its obligation to keep longer-term inflation expectations well-anchored and prevent a one-time price increase from becoming an ongoing inflation problem.

“For the time being, we are well-positioned to learn more about the likely course of the economy and the evolving balance of risks before adjusting our policy stance. We see our current policy stance as appropriate to guard against inflation risks,” the committee said.

Rand weakness

Amidst the Fed’s decision and the looming tariff deadline, the US dollar has strengthened by 2.7% since the middle of last week, pushing the rand on the cross to R18.00/USD on Thursday, 31 July.

TreasuryONE currency strategist Andre Cilliers explained that the rand is trading on the back foot, as a stronger dollar and looming 30% tariffs on South African exports to the US weigh on the currency. 

Up until now, the rand has been holding its own relatively well, boosted by dollar weakness amid uncertainty and the deterioration of the American government’s financial health.

This can be seen in the fact that while the rand has strengthened against the dollar, it has weakened against other major currencies such as the pound and euro.

Coupled with the United States’ deteriorating financial health and elevated uncertainty due to Trump’s tariffs was the expectation that the Federal Reserve would begin cutting rates again in the second half of the year.

However, the Fed’s latest decision to hold rates steady and its hawkish tone regarding economic uncertainty have sent those expectations plummeting. Bets on a rate cut in September have fallen to 45% from 65% a day ago.

South Africa, in contrast, is expected to cut interest rates on Thursday, 31 July, with the market expecting another 25 basis point cut.

This would mark the fifth cut in the current cycle and bring the cumulative total rate decreases to 125 basis points.