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An Empirical Analysis of the Impact of Global Risk Sentiment, Gold Prices, and Interest Rate Differentials on Exchange Rate Dynamics in South Africa

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  • Palesa Milliscent Lefatsa

    (School of Commerce, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa)

  • Simiso Msomi

    (School of Commerce, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa)

  • Hilary Tinotenda Muguto

    (School of Commerce, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa)

  • Lorraine Muguto

    (School of Commerce, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa)

  • Paul-Francios Muzindutsi

    (School of Commerce, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa)

Abstract

Exchange rate volatility poses significant challenges for emerging markets, influencing trade balances, inflation, and capital flows. South Africa’s Rand is particularly vulnerable to global risk sentiment, gold price fluctuations, and interest rate differentials, yet prior studies often analyse these factors in isolation. This study integrates them within an autoregressive distributed lag framework, using monthly data from 2005 to 2023 to capture both short-term fluctuations and long-term equilibrium effects. The findings confirm that higher global risk sentiment triggers immediate Rand depreciation, driven by capital outflows to safe-haven assets. Conversely, rising gold prices and favourable interest rate differentials stabilise the Rand, strengthening trade balances and attracting capital inflows. These results underscore the interconnected nature of global financial conditions and exchange rate movements. This study highlights the importance of economic diversification, foreign reserve accumulation, and proactive monetary policies in mitigating currency instability in emerging markets.

Suggested Citation

  • Palesa Milliscent Lefatsa & Simiso Msomi & Hilary Tinotenda Muguto & Lorraine Muguto & Paul-Francios Muzindutsi, 2025. "An Empirical Analysis of the Impact of Global Risk Sentiment, Gold Prices, and Interest Rate Differentials on Exchange Rate Dynamics in South Africa," IJFS, MDPI, vol. 13(3), pages 1-21, July.
    • Handle: RePEc:gam:jijfss:v:13:y:2025:i:3:p:120-:d:1692464
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    References listed on IDEAS

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    1. Oleg Itskhoki & Dmitry Mukhin, 2021. "Exchange Rate Disconnect in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2183-2232.
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    3. Vasilios Plakandaras & Theophilos Papadimitriou & Periklis Gogas & Konstantinos Diamantaras, 2015. "Market sentiment and exchange rate directional forecasting," Algorithmic Finance, IOS Press, vol. 4(1-2), pages 69-79.
    4. Shamaila Butt & Suresh Ramakrishnan & Nanthakumar Loganathan & Muhammad Ali Chohan, 2020. "Evaluating the exchange rate and commodity price nexus in Malaysia: evidence from the threshold cointegration approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-19, December.
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