Hidden force crushing the rand

Over the past six months, rising US bond yields have seen money flood out of emerging market assets, including South African stocks and bonds, and into dollar-denominated investments. 

This has strengthened the dollar and resulted in emerging market currencies, including the rand, weakening over the same period. 

Last week, the rand plunged to its weakest level in nine months against the dollar, as US job data indicated that interest rates may stay higher for longer. 

The ten-year US bond yield has risen over 1% since the Federal Reserve began cutting rates – from a low of 3.6% in mid-September 2024 to 4.79% as of 14 January 2025. 

While this may seem innocuous, it has significant consequences for global financial markets, asset value, and investor capital allocation. 

PwC South Africa senior economist Xhanti Payi explained to 702 that this makes US-based fixed-income assets relatively more attractive to investors, increasing demand for the dollar and strengthening the currency. 

At the same time, investors have been pulling money out of emerging market assets to capitalise on the higher risk-adjusted returns available in the US. 

This is all compounded by increased global uncertainty as Donald Trump begins his second term as US President. 

During times of elevated uncertainty, investors tend to flock to the dollar and US-based assets as they are viewed as a safe haven. 

Payi also explained that these short-term factors exacerbate the longer-term trend of investors worldwide pumping money into US stocks. 

As these assets have generated the best risk-adjusted returns for investors over the past decade, many view it as the only game in town regarding equity investments.

This has meant that much of global liquidity in the past few years has gone into US assets, boosting the dollar in the process.  

Payi pointed out two main drivers behind the dollar strengthening and the rand weakening – increased likelihood of interest rates being higher for longer and concerns about the policies of incoming US President Donald Trump. 

Economic data from the US has resulted in investors increasingly betting on the Federal Reserve, which is more cautious in its rate-cutting cycle, with some even forecasting hikes in 2025. 

Payi said that US GDP data and employment figures have come in stronger than expected in recent months, pointing to interest rates being higher for longer. 

This is compounded by fears of inflation being reignited if Trump manages to implement policies touted by his campaign, particularly tax cuts and import tariffs. 

Payi explained that Trump’s tax cuts will greatly increase the already large deficit the US government has run over the past five years, increasing the inflationary effect of elevated state spending. 

Furthermore, the US debt pile has risen to over $36 trillion, resulting in growing concerns about its fiscal sustainability and the ability of the government to access finance. 

Crucially, a large chunk of this pile has to be refinanced in 2025 at higher rates than before, increasing government spending on debt-servicing costs. 

Payi said all this culminates in investors demanding a greater incentive to hold US debt, which pushes yields higher. 

Trump’s plan to impose import tariffs has also driven yields higher, as this policy will put upward pressure on prices. 

Payi explained that it is a common mistake made by politicians to assume that when tariffs are imposed, the exporter, in the form of a country or economy, will foot the bill. 

However, more often than not, the cost ends up being passed on to the consumer through price increases – driving inflation higher. 

As a result, investors demand a higher premium on fixed-income assets, such as government debt, to ensure they obtain a real return on their investment. 

Both of these factors contribute to US government debt becoming increasingly attractive to investors, elevating demand for the dollar and weakening emerging market currencies.