Rupiah Weakens Driven by Expectations of Prolonged High Fed Interest Rates

The strengthening of the US dollar continues to be driven by expectations of prolonged high interest rates from the Federal Reserve. Jakarta (ANTARA) - The rupiah exchange rate closed weaker today, declining by 115 points or 0.66% to Rp17,529 per US dollar from the previous close at Rp17,414 per US dollar. Tiffani Safinia from the Research & Development of the Indonesia Commodity and Derivatives Exchange (ICDX) stated that the rupiah’s weakening is driven by expectations of higher Federal Reserve interest rates persisting longer. “The strengthening of the US dollar is still driven by expectations of high Federal Reserve interest rates lasting longer, increased demand for safe-haven assets amid Middle East geopolitical tensions, and rising global oil prices that are pressuring the rupiah,” she told ANTARA in Jakarta on Tuesday. The market projects that the Fed Fund Rate (FFR) will not decrease throughout this year and will remain at 3.75%. The CME FedWatch probability indicates dominance of 350-375 basis points (bps) until the end of the year. Additionally, the market is still awaiting the direction of US inflation, which will determine future Federal Reserve monetary policy expectations. Regarding domestic sentiment, the rupiah’s weakening is also influenced by sentiment related to foreign capital flows and investor perceptions of the Indonesian financial market. The Morgan Stanley Capital International (MSCI) issue, which previously highlighted aspects of transparency and the structure of Indonesia’s capital market, she continued, has increased global investors’ caution towards domestic assets. Furthermore, the market is also monitoring concerns regarding the government’s fiscal capacity, the large subsidy needs when the rupiah weakens, and the increased US dollar requirements for corporate foreign debt payments in the April-May period. “The combination of these factors makes the pressure on the rupiah greater compared to other regional currencies,” Tiffani explained. Looking ahead, according to her, the impact of the rupiah’s weakening on the Indonesian economy needs to be monitored, particularly on the imported inflation side. Exchange rate depreciation has the potential to increase the cost of importing raw materials, energy, and consumer goods, thereby gradually pushing up domestic prices. Pressure may also arise on the State Revenue and Expenditure Budget (APBN) as the burden of energy subsidies and foreign exchange debt payments becomes larger when the exchange rate weakens. For the corporate sector, particularly those with US dollar obligations but rupiah-based revenues, rupiah depreciation is seen to increase pressure on cash flow and operational costs. Nevertheless, the rupiah’s weakening provides limited positive aspects for export-oriented sectors by enhancing the competitiveness of Indonesian export product prices. Bank Indonesia (BI) also still has room for stabilisation through foreign exchange market interventions, optimisation of monetary instruments, and strengthening policies to control domestic US dollar demand. BI itself is said to have expressed commitment to ongoing interventions to maintain rupiah stability and to tighten rules on US dollar purchases to curb market speculation. “In general, the market currently views rupiah movements as more influenced by global sentiment and short-term capital flows. As long as geopolitical uncertainty remains high and the direction of US interest rates has not changed significantly, rupiah volatility is expected to remain high in the short term,” she said. The Jakarta Interbank Spot Dollar Rate (JISDOR) from Bank Indonesia on Tuesday also moved weaker to Rp17,514 per US dollar from the previous Rp17,415 per US dollar.