Rupiah Slips on Dollar Gains, Fiscal Worries

The Indonesian rupiah edged lower to around IDR 17,960 per U.S. dollar on Monday, ending a four-day advance as the greenback firmed on renewed Middle East tensions that lifted oil prices and stoked fears of sticky U.S. inflation and prolonged higher interest rates. Locally, rising crude oil prices and reports of fuel shortages in Sumatra added to concerns over Indonesia’s fiscal strain, even as budget execution in H1 of 2026 remained broadly on track. Still, losses were cushioned by government steps to rein in inflation after June readings neared the top of Bank Indonesia’s target band of 1-1/2% and 3-1/2%, including food price stabilisation amid El Niño risks. Meanwhile, investment momentum strengthened, with foreign direct inflows posting the sharpest rise since late 2024 in Q2, underscoring resilience in attracting long-term capital despite global uncertainty. Markets now look to Bank Indonesia’s policy meeting later this week after a cumulative 100bp of hikes in May and June.

The Indonesian rupiah hovered around IDR 17,960 per U.S. dollar on Friday, extending strength for a fourth session. Sentiment was lifted by foreign direct investment, which surged 27.4% yoy in Q2, pointing to resilient investor confidence. Meanwhile, the government is preparing to stabilise food prices amid El Niño-related supply risks after June headline inflation moved closer to the upper end of Bank Indonesia's target range. For the week, the currency was set for a modest 0.2% rise following prior weakness, after S&P reaffirmed Indonesia's investment-grade rating with a stable outlook. However, gains were capped by higher oil prices and reports of fuel shortages in Sumatra. Traders now brace for Bank Indonesia's policy meeting next week after policymakers delivered a total of 100bp rate hike in May and June. Globally, a softer U.S. dollar lent support, with the dollar index steady but on track for a weekly decline after cooler U.S. inflation reduced Fed rate hike expectations.

The Indonesian rupiah firmed to around IDR 18,000 per U.S. dollar on Thursday, strengthening for a third session as the U.S. dollar eased further after softer U.S. inflation reduced bets of an imminent Fed rate hike. Locally, sentiment was underpinned by government plans to intensify measures to stabilise food prices and curb inflation amid El Niño-related supply risks. In June, annual inflation accelerated, moving closer to the upper end of Bank Indonesia's 1-1/2%-3-1/2% target band. However, gains were capped by elevated crude oil prices, which renewed concerns over the import bill. Traders also stayed cautious as higher non-subsidized fuel costs, weak factory activity, and worries over household income and spending clouded the growth outlook. Focus now shifts to Bank Indonesia's policy meeting next week, with markets watching whether officials maintain their tightening bias after 100bp of rate hikes during May and June, as declining forex reserves continue to weigh on the currency.