ABSTRACT This study uses the OLS estimation method to analyse the factors that determine exchange rate variation in South Africa. Two groups of explanatory variables are used: the first group comes from extant empirical studies and the other group consists of new variables. The analysis of existing variables reveals that the variables are individually and jointly insignificant. The explanatory variables used in the regression include Gross Domestic Product, Consumer Price Index and Inflation Rate. Quarterly data for these variables are used in the estimation. The second regression uses the following explanatory variables: South Africa’s Foreign Reserves, South Africa’s Total Money Stock, South Africa’s Prime Overdraft Rate and the USA Interest rate. According to the results, all the variables but one (South Africa’s Foreign Reserves) are found to be statistically significant. The coefficient of determination was remarkably higher than the one obtained from the first regression. The study calls for the South African policymakers to increase the interest rate in order to reverse the adverse effects of steady depreciation that has been experienced in the exchange rate recently
