The South African rand strengthened to a five-month high on Thursday, as risk sentiment improved on growing bets the Federal Reserve may cut interest rates in September.

At 1029 GMT, the rand traded at 18.2175 against the dollar , 0.29% stronger than its previous close. It briefly hit 18.1950 earlier in the day, a level not seen since mid-December.

The dollar index was up 0.2% against a basket of currencies.

Data on Wednesday showed U.S. core inflation eased to its slowest pace in three years last month, pulling forward expectations for rate cuts in the world's biggest economy.

"Risk sentiment has improved on the back of the rate cut optimism, and we have the rand trading below the 18.30 mark... which is in line with stronger EM markets," said Andre Cilliers, currency strategist at TreasuryONE.

There are no major economic data releases scheduled in South Africa until Wednesday, when local inflation figures are due.

However, economists warned that despite the rand's recent gains, markets remain cautious ahead of a national election on May 29.

"We think risks around the upcoming election in South Africa, among other factors, will cause renewed weakness in the currency before long," said Jonathan Petersen, senior markets economist at Capital Economics.

On the stock market, the Top-40 and the broader all-share indices were both around 0.4% higher.

South Africa's benchmark 2030 government bond was stronger, with the yield down 2.5 basis points to 10.365%. (Reporting by Bhargav Acharya; Editing by Bernadette Baum and Jan Harvey)