Indonesian Rupiah Hits Yearly Low Due to Strong US Dollar


Jakarta, – The Indonesian rupiah has reached its lowest point this year due to the relentless strength of the United States dollar, with one US dollar buying just over Rp 15,622 on Thursday evening. Over the past month, the rupiah has depreciated by more than 2.3 percent, hitting a low of 15,647 on Wednesday.

Experts suggest that this depreciation is primarily a result of the robust US dollar rather than any inherent weakness in the rupiah. Market sentiment is increasingly pointing toward a hawkish stance by the US Federal Reserve (Fed) in the near term.

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The Japanese yen has also seen a significant drop against the US dollar, falling below the psychological threshold of 150 yen per dollar this week. The US dollar index benchmark has been on an upward trajectory for months, gaining approximately 7 percent since mid-July.

Economists interviewed by The Jakarta Post believe that the dollar’s rally may not persist for much longer, regardless of whether the Fed decides to raise the federal funds rate (FFR) in November or not. They anticipate the rupiah hitting its lowest point for the year this month, just ahead of the Federal Open Market Committee’s (FOMC) meeting on November 1, when the Fed will announce its interest rate decisions.

Bank Indonesia (BI) Governor Perry Warjiyo previously mentioned that the central bank expected a 25 basis points (bps) increase in the Fed’s key interest rates in November. If this happens, it would align the lower and upper rates for the dollar with BI’s rate for the rupiah at 5.75 percent. Such a situation could lead to increased pressure for capital outflow from Indonesia.

However, data from the US derivatives marketplace CME Group indicates that a majority of market participants still do not expect an FFR hike in November.

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Bank Permata Chief Economist Josua Pardede believes that clarity regarding the FFR’s peak “will be a breath of fresh air” for the market, even if it involves another 25-bps increase. Pardede suggests that investors may turn to more risky assets in emerging markets, including rupiah assets, once the Fed provides a clear picture of its future intentions, including indications of when it might start cutting its benchmark rate, which is expected to occur in 2024.

Pardede also mentions that US real sector indicators, set to be released later this month, could contribute to calming the dollar’s surge.

BI has stated that it has no plans to further raise its key rate this year, and inflation remains manageable, with consumer price index growth decreasing more quickly than expected after reaching nearly 6 percent in September last year. Nevertheless, BI’s priority is to stabilize the rupiah exchange rate, and it is willing to intervene directly in the foreign exchange market if necessary. BI has also expressed openness to buying bonds to manage yields.

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Teuku Riefky, an economist from the Institute for Economic and Social Research at the University of Indonesia’s Faculty of Economics and Business, notes that rupiah depreciation will have a direct impact on sectors heavily reliant on imports, as 90 percent of Indonesia’s imports consist of auxiliary and capital goods.

Bank Mandiri Chief Economist Andry “Asmo” Asmoro highlights that a weak rupiah could lead to liquidity problems and adds that the rupiah’s future weakness depends on the Fed’s policy stance in the upcoming FOMC meeting.

Bank BCA Chief Economist David Sumual suggests that, aside from the Fed’s monetary policy, oil prices will also affect the rupiah. However, he believes that the rupiah’s weakness is temporary and that Indonesia’s economic fundamentals can cushion a depreciation to Rp 15,700.

Josua Pardede of Bank Permata notes that Indonesian exporters, particularly in the manufacturing sector, could benefit from a stronger dollar. Nevertheless, given the deteriorating global economy, exports still face significant challenges.

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