Indonesian Rupiah hits record low vs USD on Middle East tensions; USD/IDR conquers 17,700
- USD/IDR continues to scale higher as the IDR remains depressed amid economic risks.
- Capital outflows from Indonesia's bond and equity markets further undermine the IDR.
- Inflation fears lift Fed rate hike bets, underpinning the USD and also supporting the pair.
The USD/IDR pair prolongs its recent well-established uptrend and advances to a fresh all-time peak, beyond the 17,700 mark, at the start of a new week.
The Indonesian Rupiah (IDR) continues to underperform on the back of economic risks stemming from the ongoing conflict in the Middle East. As Indonesia is a net Oil importer, the war-driven surge in energy prices has increased the country's import and subsidy costs. This led to capital outflows from Indonesia's bond and equity markets amid concerns over the government’s spending plans, market transparency, and central bank independence.
Meanwhile, President Prabowo Subianto spoke about the IDR's weakness and said that villagers were not affected by it because they don't transact in the US Dollar (USD). In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, advanced to a six-week high amid concerns that the war-driven surge in energy prices will rekindle inflationary pressure and force the US Federal Reserve (Fed) to adopt a more hawkish stance.
According to the CME Group's FedWatch Tool, traders are currently pricing in over a 50% chance that the US central bank will raise borrowing costs by the end of this year. The outlook remains supportive of elevated US Treasury bond yields and favors the USD bulls, suggesting that the path of least resistance for the USD/IDR pair is to the upside. Hence, any corrective pullback might still be seen as a buying opportunity and remain cushioned.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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