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Indonesian Rupiah advances as US Dollar struggles despite increasing risk aversion

  • USD/IDR may rise as Bank Indonesia unexpectedly held rates at 5.75% in July.
  • The US Dollar loses ground despite rising safe-haven demand amid escalating Middle East tensions.
  • CME FedWatch tool shows a 35.8% chance of a July Fed hike and an 82.1% probability for September.

USD/IDR depreciates after registering over 0.5% gains in the previous day, trading around 18,020 during the Asian hours on Friday. However, the pair may see upward momentum following Bank Indonesia's (BI) unexpected decision to hold its benchmark interest rate steady at 5.75% in July. Rather than opting for further rate hikes to support the currency, the central bank has chosen to focus on targeted currency stabilization measures.

Meanwhile, proposed defense spending cuts are intended to reinforce Indonesia’s broader fiscal health. However, these gains may be offset by rising global oil prices, which continue to put a ceiling on the rupiah's potential upside by driving up inflationary pressures.

The USD/IDR pair holds losses as the US Dollar (USD) struggles despite rising safe-haven demand due to escalating conflicts in the Middle East. US-Iran conflict pushes crude oil prices higher. An oil-driven inflation spike has fueled expectations that the US Federal Reserve (Fed) might resume raising interest rates.

According to the CME FedWatch tool, money markets are currently pricing in roughly a 35.8% chance of a Fed rate hike this month, alongside an 82.1% probability of at least a quarter-point hike in September.

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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