Rupiah Set for Second Weekly Decline Amid Dollar Strength

The Indonesian rupiah weakened toward IDR 17,950 per U.S. dollar on Friday, extending recent losses as the dollar index hovered near a two-month peak amid expectations that the Fed may tighten policy further, with inflation concerns mounting on elevated oil prices and robust U.S. economic data. Domestically, caution prevailed ahead of August trade and September inflation reports next week, with annual inflation accelerating to 3.19% in August amid higher food costs linked to El Niño. Fiscal concerns also lingered given Indonesia’s reliance on oil imports, while officials warned that rising energy prices heightened inflation risks. Persistent FX demand from importers and capital outflows also added pressure. Earlier this week, Bank Indonesia held its benchmark rate at 5.75% for a third month following cumulative 100bp of hikes since May, while continuing FX intervention and other stabilisation steps. The rupiah was on track for a second straight weekly decline, down nearly 1% so far.

The Indonesian rupiah slipped to near IDR 17,900 per U.S. dollar on Thursday, extending its recent decline as the dollar index hovered near a two-month high amid surging U.S. Treasury yields and bets on further policy tightening following solid U.S. private-sector activity. Locally, fundamentals remained weak, pressured by softer consumer confidence and sluggish household spending. Fiscal worries added pressure as higher oil prices lifted budget risks while lawmakers pushed to amend the State Finance Law to allow deficits above 3% of GDP. Bank Indonesia has sought to support the currency through measures beyond interest rates, including raising the FX swap hedging incentive to 25% to encourage foreign capital inflows and curb speculative pressure. The central bank kept its benchmark rate at 5.75% for a third month in September after raising it by a cumulative 100bp in three moves since May. The rupiah has weakened about 0.8% so far this week, setting up a second straight weekly loss.

The Indonesian rupiah traded near IDR 17,820 per U.S. dollar on Wednesday afternoon, recovering from an intraday low of IDR 17,875, after Bank Indonesia held its benchmark rate steady at 5.75% for a third month, in line with estimates. The decision was the first policy meeting under newly appointed Governor Destry Damayanti and followed a total 100bp increase in three moves during May and June, when policymakers tightened policy to support the currency after it fell to record lows against the dollar. The rupiah has since regained some ground but faced renewed pressure in recent weeks as concerns over Indonesia’s fiscal outlook intensified amid higher oil prices and lawmakers’ push to revise the 2003 State Finance Law and allow a wider deficit above 3% of GDP. A still-wide interest-rate differential offered some support, while a firmer U.S. dollar tempered gains. The dollar index stood near an eight-week high as hawkish Fed signals reinforced bets on additional hikes later this year.