Rand can dip below R17 to the US dollar 

South Africa’s rand is trading much weaker than its fair value and can appreciate sharply in the short term due to a weakening US dollar and stronger local economic data. 

Coupled with continued fiscal prudence and positive movements from ratings agencies, the rand could drop below R17 to the US dollar and trade with a R16 handle. 

The currency could even overshoot this level and appreciate towards its fair value, estimated at R11.54, but then drift higher due to South Africa’s elevated fiscal and political risks. 

This is feedback from Old Mutual chief economist Johann Els, who explained the factors potentially aligning to push the rand to strengthen significantly versus the dollar. 

The main driver behind the rand holding its own against the dollar, despite elevated global uncertainty, is the greenback’s weakness. 

Thus, the rand has not necessarily strengthened against the dollar as much as the US currency has weakened so far in 2025 amid uncertainty and the deterioration of the financial health of the American government. 

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 President Trump’s tariffs is the expectation that the Federal Reserve will begin cutting rates again in the second half of the year. 

This typically translates into a weaker dollar as investors move capital towards assets with higher risk-adjusted returns. 

The Federal Reserve is broadly expected to hold the rate for the next two to three meetings, after which it will cut rates by 100 to 125 basis points to prevent the American economy from slowing down further, Els said. 

Els explained that the Federal Reserve is proactive and will not wait to see if the slowdown is significant, with it cutting at any sign of economic trouble. 

Yields becoming less attractive in the United States will be coupled with the effects of ongoing excessive spending from the American government, which has reached a point of concern. 

American fixed-income assets, such as Treasury bonds, are no longer seen as a safe haven for investors, as they are becoming increasingly wary of US fixed-income investments. 

Els said this does not mean that US equities are no longer dominant, with them poised to continue generating superior returns. 

As a result, a weakening dollar will result in the rand appreciating versus the greenback, helping to keep inflation in check and limit the impact of rising oil prices. 

The rand’s current value versus its fair value, on a purchasing power parity basis, can be seen in the graphs below. 

Local factors still at play

For the rand to approach its fair value, local factors will also have a part to play in making South Africa a more attractive investment destination. 

Most importantly, the country’s economy has to grow faster to ease pressure on the state’s finances, as this will generate increased revenue without increases in tax rates and improve its debt-to-GDP ratio. 

However, Els does not think that significantly faster growth of over 5% is achievable in South Africa on a sustained basis without major reforms to the country’s labour market. 

Rather, South Africa’s current ongoing reforms in the electricity and logistics sector, along with the increased confidence in the government, will only boost growth to around 2.5% in the coming years. 

While this is a significant improvement, it is not enough to significantly ease the state’s financial troubles and tackle unemployment. 

As a result, the National Treasury will have to continue with its policy of fiscal consolidation to improve the state’s financial health by limiting spending growth. 

So far, this policy has reaped rewards, with the government running consecutive primary budget surpluses. This should result in the debt burden stabilising and coming down. 

The main benefit of this, Els said, is that it will result in positive ratings upgrades, which will bring more investment to the country, strengthen the rand, and boost economic growth. 

Along with improved economic data expected in the second half of 2025, the rand could strengthen significantly. 

If this is coupled with a move to a lower inflation target, the rand could even be trading with a R16 handle, Els said. 

This means the rand could drop below R17 to the dollar this year and edge closer towards its fair value, with fiscal risk still keeping it relatively elevated. 

A lower inflation target should also result in the rand being a more stable currency in the coming years, boosting certainty in the local economy.