Indonesian Rupiah weakens as Fed rate hike odds lift US Dollar
- USD/IDR gains as strong US jobs data sparked expectations of a Federal Reserve rate hike.
- CME FedWatch tool suggests a 58.3% probability of a 25-basis-point Fed rate increase in September.
- Planned fiscal deficit reduction to 2.4% by 2027 reinforces government financial prudence.
USD/IDR extends its gains for the second successive day, trading around 17,700 during the Asian hours on Monday. The pair gains ground as the US Dollar (USD) recovers its daily losses, driven by stronger-than-expected United States (US) employment data fuels expectations of an imminent Federal Reserve interest rate hike.
According to the US Bureau of Labor Statistics, August Nonfarm Payrolls rose by 162,000, significantly outperforming the 56,000 forecast. Meanwhile, the unemployment rate held steady at 4.1%, and annual wage growth slowed less than anticipated to 3.1%. Following these figures, traders rapidly priced in tighter monetary policy, with the CME FedWatch tool indicating a 58.3% probability of a 25-basis-point Fed rate increase in September.
Additionally, the Greenback receives support as rising crude oil prices have stoked fears of rekindled inflationary pressures following a geopolitical escalation between the US and Iran over the weekend. The conflict intensified after the US targeted three Iranian tankers in response to missile attacks on its warships, leading Tehran to establish a new restricted zone around the Strait of Hormuz.
The upside of the USD/IDR pair could be restrained as the Indonesian Rupiah (IDR) may find support as sentiment was supported by stronger external buffers and signs of fiscal prudence.
Indonesia’s forex reserves for August rose to a five-month high of USD 146.5 billion, helped by government withdrawals of external loans. Meanwhile, the government’s plan to lower the 2027 fiscal deficit to 2.4% of GDP from 2.68% this year reinforced views of tighter fiscal management.
Analysts at OCBC highlight that, speaking at the Sarasehan 100 Ekonom Indonesia in Jakarta last week, Bank Indonesia Governor Destry Damayanti doubled down on her recent guidance, reinforcing the “stability-first” message she had set out earlier. They note that Destry stressed that policy cannot be framed purely through a domestic inflation lens, given the “higher-for-longer” global rate environment and the imperative to keep Indonesian assets “attractive to foreign investors,” underscoring BI’s focus on safeguarding the Rupiah and macro stability even as it continues to support growth.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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