Indonesian Rupiah declines despite prevailing high interest rates, weaker US Dollar
- USD/IDR may face challenges as cumulative 100 bps rate hikes could boost support for the Indonesian Rupiah.
- The US Dollar struggles following unexpected fiscal policy moves to cap rising Treasury bond yields.
- US Treasury Secretary Scott Bessent signaled buybacks over $4 billion to show elevated yields mismatch true economic fundamentals.
USD/IDR gains ground after three days of losses, trading around 17,740 during the Asian hours on Monday. However, the currency pair could face headwind pressure as the Indonesian Rupiah (IDR) may draw renewed support from lingering high interest rates. That monetary tailwind follows a cumulative 100-basis-point rate hike delivered between May and June to defend the currency.
Rupiah stability remains in focus as BI flags risk from rising US yields
Commerzbank’s Moses Lim notes that Bank Indonesia framed its decision to keep the BI Rate unchanged as part of a broader stability push, with the central bank stressing that the current pause “remains consistent with efforts to strengthen the rupiah’s stability against the impact of heightened global volatility caused by the war in the Middle East.” Lim adds that the risk backdrop is still evolving, with Acting Governor Destry Damayanti cautioning that “rising US Treasury yields could require a stronger future response,” underscoring BI’s readiness to tighten further if external pressures on the IDR intensify.
Moreover, the USD/IDR pair may depreciate as the US Dollar (USD) struggles under pressure from newly announced fiscal measures in Washington. Financial markets were caught off guard when the US Treasury Department pledged to at least double its buybacks of longer-dated government debt to curb rising bond yields. Treasury Secretary Scott Bessent indicated that these buybacks could exceed $4 billion, representing a strategic push to signal that elevated yields fail to accurately reflect underlying economic fundamentals.
However, the Greenback's downside may be constrained by rising safe-haven demand driven by escalating geopolitical tensions in the Middle East. Friction intensified after Iranian Foreign Minister Abbas Araghchi dismissed upcoming US sanctions as an act of desperation, while Iranian Security Chief Mohsen Rezaei warned of "earthquake-like" retaliation if US President Donald Trump takes further action, reinforcing a risk-off mood across global markets.
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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