Rupiah hits lowest level in 41 months on dollar demand

The Jakarta Post, Jakarta

The rupiah fell to a 41-month low on Thursday on high corporate demand for the U.S. dollar for import needs, exacerbated by a strengthening greenback against other major currencies and high oil prices.

Aggressive central bank intervention in the forex market however, managed to keep the rupiah at bay -- at least for the moment -- from breaking the psychologically sensitive Rp 10,000 level.

The rupiah slumped to an intraday low of Rp 9,975 on Thursday, before finally closing at Rp 9,950, its lowest since March 2002.

The local forex market was closed on Wednesday for Independence Day celebrations but saw the rupiah closing slightly higher at Rp 9,920 on Tuesday's trading.

With Thursday's close, the rupiah has gone down by 6.7 percent this year, making it among the worst-performing currencies in the region.

Currency analyst Khalil Rowter said the rupiah's weakening was due to the currency being under heavy pressure from both external and internal factors.

"The external factor is primarily due to the Japanese yen's recent weakening against the U.S. dollar, which brought other Asian currencies down," he said.

"The domestic factor, meanwhile, is related to the huge dollar demand from state oil and gas firm PT Pertamina for oil imports."

Pertamina receives its daily dollar needs of some $50 million for oil imports from a consortium of state banks and was not seen in the $200 million local forex market on Thursday, prompting analysts to conclude that the dollar-buying drive was spurred by private corporations concerned about rising oil prices.

Khalil said there was a high possibility that the rupiah could break through the Rp 10,000 a dollar level in the near future, as the market had already considered the Rp 9,800 level as its new base and was now testing the ground at Rp 9,900.

"If it's only a Rp 35 band left, I see it very possible, perhaps even by the end of this week," he said.

If the rupiah did break the psychologically sensitive level, there would also be a strong tendency for the rupiah to snowball towards the edge of a further plunge, with political consequences looming large, he said.

"There will surely be strong public outcry, (with people) saying the government and the central bank have failed in defending the rupiah. It will erode the public's confidence in the government." The government's 2006 state budget draft had also failed to impress the market -- if not giving it negative sentiment, he said.

The draft budget assumes the rupiah will average at Rp 9,400 to the greenback next year. Observers have deemed unrealistic that assumption, along the oil price projection of a $40 barrel average, saying the rupiah would likely average Rp 9,500 to the dollar this year, up from its revised-up Rp 9,300 in this year's budget.

Bank Indonesia (BI) deputy governor Aslim Tadjuddin was quoted by Dow Jones as saying that the central bank was ready to intervene the market to defend the rupiah and hoped that the dollar would not rise to Rp 10,000.

Whether the bank could successfully defend a strong rupiah slide, however, is still under question, with data from BI showing corporate dollar demand in the country continuing to strengthen, with $9.2 billion worth bought during the year's second quarter, up from Rp 7.7 billion in the first.

Indonesia's forex reserves have also fallen to $32 billion as of this month from $36 billion earlier in the year. Aslim said, however, that such a level remained safe and adequate.