Indonesian Rupiah declines despite higher August inflation

USD/IDR gains as the US Dollar rebounds on hawkish Fed sentiment and rising September rate hike bets.
Indonesia’s annual inflation rose to 3.19% in August, exceeding market forecasts.
Chinese factory activity expanded for a ninth straight month, which could provide support to the Indonesian Rupiah.

USD/IDR edges higher after registering minor losses, trading around 17,770 during the Asian hours on Tuesday. The currency pair holds its ground as the US Dollar (USD) rebounds, driven by hawkish sentiment surrounding the Federal Reserve (Fed).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Traders have sharply increased their bets on a September rate hike following remarks from Fed officials indicating that more work remains if inflation does not consistently return to the 2% target. Reflecting this shift, the CME FedWatch Tool now prices in a greater than 66% probability of a rate hike in September, up significantly from roughly 41% just a week ago. Investors are closely monitoring a busy economic calendar for further policy cues, with upcoming US manufacturing and services sector data paving the way for Friday’s crucial August Nonfarm Payrolls report.

USD outlook firm as Fed hawkishness and resilient US data underpin Dollar

Strategists at OCBC Group Research describe the recent adjustment to their currency projections as a “reset, not reversal,” noting that they “have updated forecasts after the earlier USD sell-off but still expect moderate USD strength into early 2027.” According to the team, Fed Chair Warsh’s “hawkish tone reinforced Fed credibility,” and, together with “resilient growth and sticky inflation,” should “keep policy restrictive and support the USD,” leaving the Dollar on a gently firmer trajectory over the coming years.

Meanwhile, the Indonesian Rupiah (IDR) remains under pressure following domestic inflation figures. Indonesia’s annual inflation accelerated to 3.19% in August from 2.88% in July, slightly topping market expectations of 3.13% while remaining within Bank Indonesia’s target range of 1.5%–3.5%. Core inflation reached its highest level since March 2023 at 2.92%, beating the anticipated 2.8%, while monthly consumer prices bounced back 0.21%.

Additionally, manufacturing activity in Indonesia’s top trading partner China expanded for a ninth consecutive month, with the RatingDog Manufacturing Purchasing Managers’ Index (PMI) rising to 51.5 in August to beat the 50.9 forecast and bolster broader economic optimism.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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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