Local Currency Transaction: A Cure for the Rupiah's Weakness?

In an increasingly fragmented world, the economic battle is no longer solely determined by the size of foreign exchange reserves or high economic growth. Investor confidence is now more influenced by a country’s ability to maintain stability, manage risk, and build an economic system resilient to global shocks. It is within this context that strengthening the rupiah takes on a meaning far beyond mere movements in the foreign exchange market.

Indonesia is a country with relatively strong economic foundations. Economic growth has been maintained amidst a global slowdown, inflation remains within the target range, and the financial sector is showing improved resilience. However, as an open economy, Indonesia is not entirely immune to the impact of external turmoil. Rupiah exchange rate fluctuations are still heavily influenced by shifts in global sentiment, particularly when demand for the US dollar as a safe haven currency increases. This condition ultimately raises international trade transaction costs, increases exchange rate risk, and forces businesses to bear higher hedging costs.

This phenomenon is not unique to Indonesia. Barry Eichengreen (2011) explained that the dominance of the US dollar in the international financial system persists due to network externalities. The more economic actors use the dollar in trade and investment, the greater the incentive for others to do the same. In other words, dollar dominance is determined not only by the strength of the US economy but also by the formation of a usage network that has been built over decades. Therefore, efforts to strengthen the use of local currencies in international transactions should not be interpreted as a form of ‘resistance’ against the dollar, but rather as a diversification strategy to strengthen national economic resilience.

This view aligns with the findings of Gita Gopinath (2022) from the International Monetary Fund (IMF) regarding the concept of Dominant Currency Pricing. This theory explains that most world trade is still priced in US dollars, so changes in the dollar exchange rate have a far greater influence on international trade prices than changes in the domestic currencies of individual countries. Consequently, when the US dollar strengthens, import costs rise, inflationary pressures increase, and the policy space for developing countries becomes increasingly limited. For countries like Indonesia, reducing vulnerability to these shocks is a crucial part of the strategy to maintain long-term economic stability.

Herein lies the growing relevance of developing Local Currency Transactions (LCT). LCT is not a policy aimed at replacing the role of the US dollar in the global payment system. Instead, this policy provides a more efficient alternative for bilateral transactions using local currencies between Indonesia and its partner countries. Thus, businesses have a wider choice in conducting trade and investment transactions without always having to rely on a third-country currency. LCT will have the greatest impact if combined with an industrial downstreaming strategy, so that rupiah stability not only maintains the exchange rate but also increases the added value of exports.

Indonesia’s steps in developing LCT show quite significant progress. Since its first implementation in 2018, this cooperation has been continuously expanded to include Malaysia, Thailand, Japan, China, South Korea, and the United Arab Emirates, whilst further implementation with Singapore, India, and trilateral cooperation with Hong Kong is being prepared. Domestically, 27 Appointed Cross Currency Dealers (ACCD) have been designated to facilitate transactions using local currencies, making the institutional infrastructure increasingly ready to support the policy’s implementation. Regulatory support is also continuously strengthened through various refinements to Bank Indonesia Board of Governors Regulations as a foundation of legal certainty for the business world. All these developments show that Indonesia is not reacting to global dynamics momentarily, but is building a stronger institutional foundation for the future international transaction system.

The development of LCT implementation is also reflected in its increased utilisation by economic actors. Bank Indonesia data (2026) shows that the value of LCT transactions has increased very rapidly, from approximately USD 348 million in 2018 to USD 16.28 billion in 2024, and has reached USD 32.90 billion up to May 2026. In the same period, the number of users grew from just 101 actors to more than 16,000 users, reflecting the growing confidence of the business world in local currency-based transaction mechanisms. This increase originates not only from the trade sector but also involves the manufacturing, energy, mining, automotive, transportation, financial services, and downstreaming sectors, which are national development priorities. These figures show that LCT has moved from the socialisation stage towards an increasingly mature adoption phase in international business practice.

Although the development of LCT shows a promising direction, its success should not be measured solely by the size of transaction values or the increase in the number of users. The more important essence is how this policy can strengthen investor confidence in Indonesia’s economic fundamentals. In a modern economy, investment decisions are not only based on short-term profit projections but also on the perception of a country’s ability to manage systemic risk.