Indonesian Rupiah advances despite record Current Account Deficit
- Strong Indonesian Rupiah keeps the USD/IDR currency pair under downward pressure.
- Broadening trade deficit is offset by pledged fiscal support from major partner China.
- Bank Indonesia rate pause and US Treasury yield declines further reinforce Rupiah strength.
USD/IDR extends its losses for the third successive day, trading around 17,760 during the Asian hours on Friday. The currency pair continues to depreciate as the Indonesian Rupiah (IDR) maintains its strength, defying a sharp widening of Indonesia’s current account deficit.
Indonesia recorded a record deficit of USD 12.49 billion in Q2 2026, equivalent to 3.3% of GDP, up significantly from USD 2.89 billion a year earlier. This expansion was driven by a drastic narrowing of the trade surplus to USD 1.32 billion, down from USD 10.52 billion in Q2 2025, largely caused by an import surge driven by rising oil prices stemming from conflict in the Middle East.
Despite these domestic trade headwinds, the Rupiah is drawing significant support from Indonesia's deep economic partnership with China. Market sentiment was buoyed by comments from Chinese Vice Finance Minister Liao Min, who pledged on Friday to introduce timely additional fiscal policy measures based on emerging economic trends, while maintaining policy continuity and allocating resources over a longer cycle.
Domestic monetary policy is further reinforcing currency stability. Bank Indonesia held its key interest rate steady at 5.75% for a second consecutive month during its first policy meeting under acting Governor Destry Damayanti, following the abrupt exit of Perry Warjiyo. Emphasizing continuity after 100 basis points of cumulative hikes since May, the central bank reaffirmed that its policy mix will prioritize safeguarding the Rupiah against imported inflation while utilizing liquidity tools to support broader economic growth.
Finally, downside pressure on the USD/IDR pair is being compounded by a softening US Dollar (USD). The greenback has drawn lower alongside subdued US Treasury yields, as markets react to Washington's efforts to curb elevated yields through a long-end bond buyback program.
USD buyback move seen as awkward attempt to steady long-end yields
Strategists at Scotiabank highlight that the US Treasury’s decision to double its bond buybacks is narrowly focused and modest in scope, with the plan “target[ing] longer-term rates and… limited in scale; buybacks go from USD2bn to USD4bn and run from September 9th–November 4th.” While the authorities present the move as “ostensibly a liquidity management issue,” Scotiabank notes that the timing and design of the operation “left the impression that the Treasury is trying to calm the Treasury markets after the recent ramp-up in term rates and it’s not a good look.”
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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