Indonesian Rupiah weakens as domestic protests, inflation risks loom
- Jakarta protests and El Niño weather risks weigh on investor sentiment ahead of key economic data.
- Bank Indonesia nominee Destry Damayanti promises policy continuity, emphasizing stability while supporting growth.
- The US Dollar remains strong as July's PCE inflation accelerated to 0.2%, beating market expectations.
USD/IDR gains ground for the third successive day, trading around 17,800 during the Asian hours on Thursday. The currency pair is under downward pressure as the Indonesian Rupiah (IDR) struggles against fragile domestic sentiment.
Ongoing major protests in Jakarta have left investors wary of potential unrest reminiscent of last year's turmoil. Adding to this caution, markets are bracing for next week's August inflation report, where El Niño-related weather risks threaten to drive up food prices. These concerns are further compounded by lingering external pressures and ongoing uncertainty in global energy markets ahead of the upcoming July trade data release.
Despite these immediate headwinds, reassuring comments from central bank leadership helped cap broader losses. Destry Damayanti, the sole nominee for Bank Indonesia Governor, told parliament that closer policy coordination would not undermine the central bank’s independence. She emphasized that Bank Indonesia will maintain a stance centered on economic stability while actively supporting growth, helping to reinforce market confidence in policy continuity.
The USD/IDR pair remains stronger as the US Dollar (USD) holds its ground, bolstered by robust economic data. July’s PCE price index accelerated to 0.2% month-on-month, edging past the 0.1% consensus, while the annual rate climbed to 3.7%. This surprise uptick has reinforced market bets that the Federal Reserve could deliver one final rate hike before year-end, leaving investors eagerly awaiting policy cues from Fed leadership at the upcoming Jackson Hole symposium.
Traders assess the shifting geopolitical and fiscal dynamics. Crude oil prices continued to slide following diplomatic headway in the Middle East, where Iran and Oman agreed on territorial waters and revenue-sharing along the Strait of Hormuz, easing immediate inflation anxieties.
Meanwhile, fiscal scrutiny intensified over the US Treasury’s plan to double bond buybacks, a move sharply criticized by billionaire investor Stanley Druckenmiller as detrimental to market credibility and a missed opportunity for meaningful debt reform.
Dollar bears eye renewed pressure on DXY
Strategists at Scotiabank highlight that the technical backdrop for the US Dollar Index remains fragile, cautioning that “bear pressure will build on the DXY again below 98.75,” a level they flag as an important threshold for renewed downside momentum.
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.
