Indonesian Rupiah strengthens as US Dollar weakens on easing Fed rate hike bets
- USD/IDR loses ground as Fed rate-hike bets ease.
- US Nonfarm Payrolls are projected to slow to 90,000 additions, keeping monetary policy expectations in focus.
- Bank Indonesia cites global conditions for Rupiah pressure as September inflation rose to a three-month high.
USD/IDR has pared its recent gains from the previous day, trading around 17,910 during the Asian hours on Friday. The pair depreciates as the US Dollar (USD) declines on easing Federal Reserve (Fed) rate hike bets, with the CME FedWatch Tool suggesting traders are pricing in nearly a 28% chance of an October rate increase.
However, the Greenback could regain its footing due to persistent inflation concerns from elevated energy costs and expectations of a Fed rate hike in December. Benchmark borrowing costs have seen dynamic moves, with 10- and 30-year US Treasury yields holding around 5.25% and 5.62%, respectively, after pulling back from multi-decade highs as fiscal and political instability in France sparked demand for safe-haven assets.
However, US Treasury yields remain near their highest levels since 2002, supported by expectations of further Federal Reserve tightening, underlying resilience in the US economy, and mounting concerns over the nation’s long-term fiscal and debt trajectories. Traders continue to monitor economic indicators for signals on monetary policy direction, with attention focused on upcoming Nonfarm Payrolls data. Economists project an addition of 90,000 jobs, a noticeable moderation from the previous month's 162,000, while the Unemployment Rate is expected to hold steady at 4.1%.
On the domestic front, Bank Indonesia (BI) Governor Destry Damayanti noted that recent rupiah pressure reflected global conditions, shifts in capital flows, and weaknesses in external-sector fundamentals. September headline inflation accelerated to a three-month high of 3.28%, driven by persistent food-price pressures partly linked to El Niño effects.
Analysts at ING’s Asia research team expect Indonesia’s headline price pressures to pick up in the coming months, projecting that “Indonesia’s CPI inflation [will] accelerate to 3.3% YoY, as El Niño drives further increases in food prices.” They highlight that “rising rice prices should remain a key driver,” while cautioning that “spillovers from higher food costs are also likely to add to core inflation,” pointing to a broader build-up in underlying inflationary pressures.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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