Indonesian Rupiah strengthens as BI to focus on currency stability
- Indonesian Rupiah gains after Bank Indonesia reaffirmed its focus on currency stability under new leadership.
- BI kept key interest rates at 5.75% to control imported inflation while supporting domestic economic growth.
- Hawkish FOMC Minutes reinforce market expectations for another Federal Reserve interest rate hike this year.
USD/IDR extends its losses for the second successive day, trading around 17,810 during the Asian hours on Thursday. The pair depreciates as the Indonesian Rupiah (IDR) finds solid backing from Bank Indonesia's (BI) renewed commitment to currency stability. During its first policy meeting under acting Governor Destry Damayanti, the central bank moved swiftly to reassure financial markets of its strategic consistency.
To maintain market calm, Bank Indonesia held its benchmark interest rate steady at 5.75% for the second consecutive month, signaling steady policy continuity after an aggressive 100-basis-point tightening cycle that began in May. Central bank officials emphasized that their broader monetary strategy will prioritize stabilizing the rupiah to contain imported inflation, while simultaneously deploying targeted liquidity measures to cushion domestic economic growth.
Rupiah stability and inflation targeting anchor Bank Indonesia’s policy mix
Economists at UOB Group highlight that, in her maiden lead, Acting Governor Damayanti underscored Bank Indonesia’s priority of “preserving rupiah stability amid heightened global financial market volatility” as the central bank’s key focus. At the same time, she reaffirmed BI’s commitment to “keeping inflation within BI's target range of 2.5% ±1% in 2026-2027,” signalling that price stability remains firmly embedded in the medium-term framework. UOB notes that, against this backdrop, “the overall policy mix is designed to support sustainable economic growth,” aligning the current tight monetary stance with broader macro-financial stability objectives.
The downside of the USD/IDR pair could be restrained as the US Dollar (USD) strengthens on hawkish sentiment emerging from the latest Federal Reserve (Fed) Meeting Minutes. Minutes from the July FOMC meeting revealed that officials favor hiking interest rates soon if inflation fails to cool further, aligning with broader market expectations for at least one more rate increase this year.
Moreover, Geopolitical friction in the Strait of Hormuz, where tensions between the US and Iran have intensified. While former President Donald Trump noted that oil transit continues and expressed openness to negotiations with Tehran, elevated risk aversion continues to favor the Greenback.
DBS Group Research observes that, “even with faltering diplomacy, the US-Iran conflict appears to have entered a lull,” as Washington’s approach moves away from direct “military intervention” toward imposing “unprecedented economic isolation on Iran.” Against this backdrop, strategists at Brown Brothers Harriman note that the Dollar is under mild pressure, with “USD… down against most major currencies” even as “the sell-off in stocks and bonds eased” and “crude oil prices are holding near a three-week high around $91 a barrel.” They add that “there was no fundamental catalyst behind today’s USD slump,” and argue that, from a technical perspective, “the DXY index should hold above its 200-day moving average.”
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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