Rupiah rebounds as tension eases

JAKARTA (JP): A peaceful Jakarta on the second day of the climax of the political fight between President Abdurrahman Wahid and legislators lent strength to the ailing rupiah.

Forex dealers said that the rupiah reached an intraday high of Rp 10,750 against the U.S. dollar as political tensions and worries over possible riots cooled down.

The Indonesian currency however weakened in the afternoon to close the day at Rp 11,050 but it was still much higher than Rp 11,600 at Monday's close.

Kahlil Rowter, head of fixed income research at PT Danareksa Securities, said the market had been spooked by predictions of clashes between supporters and critics of President Abdurrahman Wahid.

Other doomsday scenarios involved violent clashes with security personnel and the President's supporters running amok in Jakarta once news of a second censure against him was out.

As none of these happened, Kahlil said, a relieved market deflated their long dollar positions.

"The expectation of violence had simply escalated, the market had built up on it (fear) for too long," Kahlil said.

Concerns that the political stand off between the President and legislators would trigger a full scale riot in Jakarta, had fueled the dollar's gains in the past few weeks.

In the lead up to the House's special plenary session which had censured the President, thousands of his supporters entered Jakarta.

They took part in a mass prayer held by Nahdlatul Ulama, an organization President Abdurrahman once led.

But as legislators passed its second censure against him on Monday evening, his supporters were already peacefully leaving Jakarta.

Even the International Labor Day, which fell on Tuesday, passed by relatively calm. The market took no notice of news of minor scuffles between police and rallying labors.

Kahlil said those who had purchased the dollar at Rp 10,000 were seen selling the foreign unit on Tuesday.

"They (the market) assume that things can't get any worse than it is now, at least in the immediate future," he said.

He said that prevailing corporate demand for the dollar absorbed the fresh supply from speculators. "Without corporate demand accommodating the dollar sell off, the rupiah could not have strengthened so quickly," he explained.

He said some companies picked up the dollar to average down the dollar's cost. Before, they had purchased the foreign unit at a higher quote.

He also estimated Bank Indonesia had seized the momentum to add pressure on dollar holders through minor intervention.

According to him, Bank Indonesia's habit is to intervene on a recovering rupiah, unless the unit gets close to falling below an important psychological barrier.

Kahlil estimated the rupiah's upward trend would continue in the coming days.

"The question is for how long will this mini euphoria last," he said.

He said the rupiah recovered on news that nothing bad had happened, instead of positive economic or political developments.

The market would also run out of dollar supplies, if the unit slides to the 10,000 mark.

A stronger rupiah has also helped the Jakarta Stock Exchange Composite Index which rose to 362.22 on Tuesday trading, from its previous day closing at 358.23.

Kahlil said the rupiah's recovery could pave the way for foreign investors to hunt local stocks.

Foreign investors, he said, would convert their dollars into rupiah to purchase local shares. This process would prop up both the rupiah and the stock market index.

Once the rupiah and the market index increases to a "comfortable level", he said, investors would sell the shares on profit taking.

Aside from a capital gain in the stock market, foreign investors would also profit from a cheaper dollar, once they sold their rupiah. (bkm)