Foreign outflows weigh on Indonesian Rupiah as market sentiment weakens

• Foreign capital outflows and a falling IDX Composite weigh on the Indonesian Rupiah.
• To underpin the weakening IDR, Bank Indonesia intervenes in spot, NDF and bond markets.
• Middle East diplomacy dampens Fed rate hike expectations, leaving the US Dollar softer.

USD/IDR trades near 18,180 in Friday’s Asian session. Following three days of declines, the pair is recovering as the prospect of foreign capital outflows puts the Indonesian Rupiah (IDR) under pressure.

The IDX Composite dropped 1.29% to around 5,030 during Friday’s Asian session, underscoring fragile sentiment in Indonesia’s struggling equity market. Weaker US stock futures accounted for much of the decline. Overnight, a sharp, historic fall in Alphabet’s share price had pulled Wall Street lower, reviving wider concerns over returns on substantial artificial intelligence investments.

Persistent political tensions are compounding Indonesia’s economic pressures, with student protests continuing in major cities since early October. Fiscal concerns linked to high oil prices, continued net foreign selling and growing inflation worries ahead of next week’s October inflation release are adding to the Rupiah’s weakness. A potential floor for the currency may come from Bank Indonesia, which has reaffirmed its commitment to exchange rate stability. Its measures include active intervention in spot, NDF and DNDF markets, alongside targeted purchases of government bonds in the secondary market.

Broader US Dollar (USD) weakness, however, could constrain further gains in USD/IDR. Growing optimism about US-led diplomatic efforts to ease Middle East tensions has reduced demand for safe havens, softening the Greenback. With concerns about disrupted oil supplies and energy-led inflation fading, markets have scaled back expectations of another Federal Reserve rate hike at the upcoming December meeting. Traders now assign roughly a 75% probability to a 25-basis-point increase, according to the CME FedWatch Tool, a marked decline from 84.2% a day earlier.

3.4% US growth strengthens Dollar’s fundamental case

Third-quarter US GDP growth exceeded expectations for “3.2%,” reaching “3.4% annualised quarter-on-quarter,” according to Commerzbank’s Michael Pfister, who says “yesterday’s US growth figures for the third quarter were a pleasant surprise,” and highlights the economy’s relative strength. In his assessment, “given everything that has happened this year, it is easy to forget that there has been a strong case for a stronger Dollar in recent years,” while “the US economy is growing significantly faster than those of all the other G10 countries.” Pfister therefore sees the latest figures as further support for the Dollar’s fundamental advantage, with robust US growth continuing to set it apart from its G10 peers.