An In-depth Look at Foreign Exchange Market Mechanisms: Why the US Dollar Fluctuates Against the Rupiah
Jakarta, VIVA – When the Rupiah weakens against the US Dollar, many wonder why the dollar’s price continues to change every day. Even within a single trading day, exchange rates can fluctuate multiple times.
As of Thursday, 4 June 2026, the answer is rooted in the most basic economic principle: the law of supply and demand. Much like the prices of chillies, gold, or stocks, the value of the US Dollar is determined by the level of demand and supply in the foreign exchange (forex) market. However, the factors influencing this are far more complex as they involve the global economy.
The Dollar Strengthens When Demand Increases
In the forex market, the US Dollar is the most widely traded currency in the world. According to the Bank for International Settlements (BIS), global foreign exchange transactions reach approximately US$7.5 trillion per day.
When demand for the US Dollar increases while its supply remains relatively constant, the price of the dollar rises against other currencies, including the Rupiah. Conversely, if demand decreases or investors begin selling dollars, its value may weaken.
The Significant Influence of Federal Reserve Policy
One of the most influential factors in dollar movement is the interest rate policy of the United States central bank, the Federal Reserve, or ‘The Fed’.
When The Fed raises interest rates, US bonds and financial instruments become more attractive because they offer higher yields. Global investors then purchase these assets and require dollars to do so. Consequently, demand for the dollar increases, and the US currency tends to strengthen. Conversely, when The Fed cuts interest rates, global capital may shift to other countries offering more attractive yields, potentially weakening the dollar.
Exports and Imports Also Play a Role
International trade also affects exchange rates. When a country exports many goods to the United States, foreign buyers require that country’s currency to pay for the purchased goods. This can increase demand for the exporter’s currency.
On the other hand, if imports are significantly larger than exports, the need for foreign currency will increase, putting pressure on the domestic currency. The IMF explains that the state of the trade balance and international transaction flows are fundamental factors influencing long-term exchange rate movements.