Say goodbye to the South African rand as you know it

The South African rand has had one of its best years versus the US dollar, with it strengthening by nearly 10% against the greenback. 

Crucially, the level of the rand’s strengthening is more than that of the emerging market average, indicating that this is not a result of dollar weakness alone. 

While dollar weakness is the main driver, other factors, such as improving state finances, a lower inflation target, and soaring commodity prices, have pushed the rand higher. 

Furthermore, analysts, including the Reserve Bank Governor, have noted that the rand is more stable than it historically has been, heralding a new era for the currency. 

Old Mutual Investment Group’s Sehrish Khan explained that the rand still has room to run versus the dollar, with the greenback coming down from being heavily overvalued. 

The strength of the dollar over the past 15 years has largely been a result of the superior returns generated by US equities and fixed income, which have seen American capital markets suck up excess global liquidity. 

This has translated into a stronger dollar as it has driven demand for the greenback in global markets. However, this is set to change. 

The fundamentals, particularly strong returns from equities and bonds, that have underpinned a strong dollar appear to be eroding. 

Khan noted that US equities have lost their shine over the past two years as fears of an AI-driven bubble rise and stocks reach record-high valuations. 

American tech companies are priced to perfection, with a handful of companies generating exceptional returns in the past few years. 

However, this means that US equities have very little room to continue growing, with valuations already being historically stretched, and have significant room to fall should they fail to meet exceptionally high expectations. 

Khan explained that this has been coupled with the US economy looking increasingly fragile, with growth being driven primarily by investment from a handful of companies in AI-related infrastructure. 

A more directly negative drag on the dollar is the United States’ deteriorating fiscal health, with debt-to-GDP rising well above 100%. 

This has already impacted US bond yields, which have risen to incorporate a greater risk premium associated with American assets due to the fiscal risk. 

Another factor here is the Trump administration’s unconventional policy and volatility, which are making investors increasingly question the security of their capital in the United States. 

All of this bodes well for the rand and other emerging market currencies in the coming years, as investors look elsewhere for returns. 

A weaker dollar also tends to boost growth in emerging markets as it eases financial pressure from dollar-denominated debt and limits inflation by making it cheaper to import goods priced in dollars. 

Rand is maturing

The rand has also matured significantly as a currency, with its notorious volatility being reduced throughout 2025 due to lower inflation and a new 3% target. 

Reserve Bank Governor Lesetja Kganyago has made it clear that data indicate the rand is not the volatile currency it once was. 

Kganyago has explained that the rand is settling down into a “more mature stage of life”, saying the currency deserves more respect for its stability in recent times. 

“When people tell you the rand is a weak and volatile currency, encourage them to think again,” he said.

“I would also like more people to recognise that rand volatility has declined. Option-implied volatility is now at long-term lows.”

“Yet, outside of financial markets, most people still believe the rand is a highly volatile currency. The only problem with this view is that it no longer describes the facts in front of us.”

Kganyago has explained that the rand’s recent stability stems from South Africa’s lower inflation over the past year, which is more in line with developed markets.

It is important for this to continue over the long run, as investor confidence in South Africa will not be built overnight.

This brings immense benefits for the country, primarily by making investing more attractive as investors do not have to account for severe currency fluctuations. 

Efficient Group chief economist Dawie Roodt explained that a more stable currency will have substantial benefits for South Africa in the long run. 

“Currency volatility is a price that we pay in South Africa. Now, with inflation being lower and people believing inflation will remain low, that volatility is reduced,” Roodt said. 

“This makes it easier and cheaper to trade internationally using the rand and for foreigners to invest in local assets using the rand.” 

This is where the real benefit of a more stable currency comes from, with there no longer being a cost, in terms of inflation eroding purchasing power, associated with investing in South African assets. 

As a result, this will make investing in South Africa more attractive as the returns on any investment will not be lost to a weaker currency upon conversion. 

“Foreigners do not want to buy our bonds because they buy the rand and then the bonds, running a risk that when they sell the bonds and take the money out of the rand, it has weakened and they have lost on the deal,” Roodt said. 

“But, if foreigners believe that our inflation rate is going to be relatively low and stable, that means the exchange rate will be relatively stable, and they are likely to take more of a chance on South African bonds and equities.”