Indonesian Rupiah plummets to 17,324 or fresh record low vs USD on Mideast tensions
- USD/IDR scales higher for the third straight day amid economic concerns due to Middle East tensions.
- The USD benefits from safe-haven flows and less dovish Fed bets, further providing a boost to the pair.
- Comments from the BI Deputy Governor and Chief Economic Minister fail to provide any respite to the IDR.
The USD/IDR pair gains strong follow-through positive traction for the third successive day and rallies beyond the 17,300 level, hitting a fresh all-time peak during the Asian session on Thursday.
The Indonesian Rupiah (IDR) ranks among the worst-performing emerging Asian currencies this month and continues to underperform amid economic risks stemming from elevated Middle East tensions. Furthermore, the US-Iran standoff over the Strait of Hormuz remains supportive of elevated Crude Oil prices, fueling concerns about rising inflationary pressures and Indonesia's trade balance. Furthermore, the risk-off impulse is driving capital towards safe-haven assets, like the US Dollar (USD), and contributing to the USD/IDR pair's strong move higher.
Thomas Djiwandono, Deputy Governor of Bank Indonesia (BI), said that the IDR depreciation is caused by rising global uncertainty and reiterated the central bank's efforts to strengthen the interest rate structure to attract foreign inflows. Thomas added that the BI will continue increasing the intensity of intervention to stabilise the domestic currency. Moreover, Chief Economic Minister, Airlangga Hartarto, said on Thursday that the economic growth in the first quarter is expected to reach around 5.5% on the back of holiday spending and government stimulus. This, however, fails to provide any respite to the IDR.
The USD, on the other hand, benefits from persistent geopolitical uncertainties and expectations of a less dovish Federal Reserve (Fed) amid still sticky inflation and resilient economic activity. Meanwhile, the initial optimism led by a temporary extension of the US-Iran ceasefire fades rather quickly amid the lack of progress in peace talks . This, in turn, tempers investors' appetite for riskier assets, which further underpins the Greenback's safe-haven status and contributes to the USD/IDR pair's move up. The fundamental backdrop favors bullish traders, though extremely overbought conditions warrant some caution.
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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