Indonesian Rupiah declines as US Dollar gains despite easing Fed rate hike odds
- USD/IDR rises as the US Dollar shows resilience amid shifting Fed policy outlook.
- Fed Governor Waller favored keeping interest rates unchanged in September, provided upcoming inflation figures remain stable.
- Bank Indonesia noted controlled inflation, but El Niño weather risks threaten food prices and growth.
USD/IDR gains ground after two days of losses, trading around 17,670 during the Asian hours on Friday. The currency pair is pushing higher as the US Dollar (USD) holds onto its recent gains after rebounding from intraday losses. However, further upside for the Greenback may remain constrained by softening hawkish expectations surrounding the Federal Reserve's monetary policy path.
Federal Reserve Governor Christopher Waller recently signaled a preference for holding interest rates steady at the upcoming September meeting, assuming upcoming inflation figures offer no major shocks. Waller’s dovish tone contrasts sharply with the hawkish remarks delivered by Chairman Kevin Warsh a week earlier. Following Waller’s comments, market pricing shifted noticeably, with the CME FedWatch tool showing the probability of a September rate hike falling to 50.2%, down from 63.2% the previous day.
Market participants are now turning their attention to the upcoming US August employment report for clearer guidance on the Fed's next moves. Consensus estimates project Nonfarm Payrolls (NFP) to expand by 56,000 jobs, with the national Unemployment Rate expected to hold firm at 4.1%.
Dollar pressured as TD Securities cites currency intervention and Fedspeak boost
According to strategists at TD Securities, recent moves in foreign exchange markets have been shaped by a combination of official action and policy communication, with the bank highlighting that "currency intervention and Fedspeak boost" have been key in pressuring the Dollar and supporting precious metals, while also influencing positioning across major FX futures.
In regional developments, Bank Indonesia (BI) Governor Destry Damayanti noted that domestic inflation remains well within target, urging closer coordination between the government, central bank, business sector, and economists to foster economic growth. Still, market optimism was checked by lingering fears that El Niño weather patterns could disrupt food supplies and drive up price pressures in the months ahead. Sentiment also remains cautious ahead of next week's domestic data releases, including August foreign exchange reserves, consumer confidence, and July retail sales, which will provide deeper insight into consumer demand and the local policy outlook.
Technical Analysis: USD/IDR remains below nine-day EMA
In the daily chart, USD/IDR trades at 17,670, keeping a bearish near-term tone as it holds below the nine-day Exponential Moving Average (EMA) while still trading above the longer-term 50-day EMA. The 14-day Relative Strength Index (RSI) sits near 34, hovering close to oversold territory and hinting that while downside pressure persists, the immediate selling impulse may be losing some momentum.
On the topside, initial resistance is seen at the nine-day EMA around 17,740, and a daily close above this barrier would be needed to ease the current bearish pressure and open the way for a deeper recovery. On the downside, the broader trend backdrop remains underpinned by the 50-day EMA near 17,840, acting as a higher structural floor, though the pair would need to reclaim this level to signal a more durable shift away from the current weak bias.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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