Graphic: renjith krishnan

South Africa's rand fell as much as 1.6 percent against the dollar on Thursday, hitting its weakest level in nearly two weeks as expectations of near-term US monetary easing were pared back, enabling a broad-based dollar rally.

With domestic news taking a back seat to global developments, the rand rallied only briefly after data showed factory output outpaced forecasts in May, backing the case against a local interest rate cut next week.

The rand touched a session low of 8.3745/dollar, its softest since June 29, and was trading at 8.3485 by 17:42 SA time, down 1.29 percent on the day.

It was the weakest performer among 20 emerging market currencies tracked by Reuters.

“It's a combination of risk emanating from the euro zone and lack of support that people were expecting from the Fed (US Federal Reserve). There's still reason for people to move away from riskier markets at this stage,” ETM market analyst Luke Barnett said.

“It tends to be the case for the rand (to underperform) on these occasions since it's one of the most liquid emerging market currencies. I don't really think it speaks to local fundamentals right now.”

Government bonds rallied despite the weaker currency, with the yield on the 3-year benchmark touching an all-time low of 5.81 percent before coming back slightly to close at 5.855 percent.

The yield for the 14-year paper, also heavily traded on the secondary market, was down 5.5 basis points at 7.695 percent.

Foreign investors in particular have been buying local bonds in anticipation of South Africa's inclusion in Citi's World Government Bond Index in October. - Reuters