Rupiah attacked
The region's contagion of currency speculation finally hit the Indonesian currency after a concerted attack yesterday, pushing down the rupiah to as low as Rp 2,665 to the dollar. That was a plunge of almost 5 percent, its largest-ever, single-day loss after the previous record low of Rp 2,642 last Friday. The rupiah recovered later in the afternoon to Rp 2,635 after some intervention by Bank Indonesia even though the rate had never fallen below the Rp 2,681 level, the lower end of the trading band set on July 11 as the threshold for intervention.
None of the market analysts doubted that the speculative attacks on the rupiah were simply a regional contagion after similar attacks on the Thai baht, Philippine peso and Malaysian ringgit.
The move against the rupiah was nevertheless surprising as it came after Bank Indonesia took what it called a preemptive move to ward off speculators. The bank widened the rupiah-dollar trading band from 8 percent to 12 percent on July 11 immediately after the de facto devaluation of the Philippine peso and Thai baht early this month . The jittering, however short term it may be, still seemed inordinate, especially after the strong vote of confidence in Indonesia's macroeconomic management and economic fundamentals by the creditor consortium (Consultative Group on Indonesia) at its latest annual meeting in Tokyo last week.
Most dealers saw the attacks as a test, by foreign speculators, on the central bank's intervention band. Foreign speculators seemed unsatisfied until they had tested all the currencies of Southeast Asian countries with large current account deficits-- Thailand, the Philippines, Malaysia and Indonesia.
Even though pressures on the rupiah were a regional contagion, Bank Indonesia's quick decision yesterday to intervene, even though the rate had not breached the lower end of the band, should be welcomed as a signal of its strong determination to defend the rupiah.
Most important was the effectiveness of the intervention in preventing the market nervousness from worsening and possibly causing unnecessary jitters among domestic traders. However strange it may seem, domestic traders usually follow the sentiments of foreign speculators.
The rupiah volatility is expected to be a temporary phenomenon as the attacks had nothing to do with doubt about the economic fundamentals, which all foreign and domestic analysts assess as strong, nor about the macroeconomic management, which is seen as sound.
Complacency is by no means warranted, especially because the currency markets in the region are predicted to remain rather volatile for the next few days. The government should continue to provide the right signal to the market. That calls for strong policy consistency both in the macroeconomic and microeconomic sectors.
The central bank needs to strengthen cooperation with commercial banks in defending the rupiah from speculative forays. Cooperation also means that domestic banks should not let themselves become prey to the jittery sentiments of foreign speculators. The business community could also contribute greatly to putting out the speculative fire by not allowing themselves to be swayed by wild rumors among foreign fund managers.