Indonesian Rupiah declines as fuel shortages amplify concerns over fiscal strain

USD/IDR rises as the Indonesian Rupiah weakens due to higher oil prices and Sumatra fuel shortages.
Q2 foreign direct inflows rose at their fastest pace since late 2024, demonstrating Indonesia's resilience in attracting long-term capital.
The US Dollar continues losing ground as the Federal Reserve is widely expected to hold interest rates steady.

Akhtar Faruqui FXStreet

USD/IDR halts its four-day losing streak, trading around 18,020 during the Asian hours on Monday. The pair appreciates as the Indonesian Rupiah (IDR) faces headwinds from rising crude oil prices. Reports of fuel shortages in Sumatra have further amplified concerns regarding Indonesia’s fiscal strain, though budget execution for the first half of 2026 has remained broadly on track.

On a positive note, investment momentum in the region has strengthened. Foreign direct investment inflows recorded their sharpest rise since late 2024 during the second quarter, underscoring Indonesia's continued resilience in attracting long-term capital despite global economic uncertainty.

However, the upside potential for the USD/IDR pair may remain restrained. The US Dollar (USD) continues to lose ground as the Federal Reserve is widely anticipated to keep interest rates steady at its upcoming meeting. However, market pricing via the CME FedWatch Tool now reflects a 61.4% probability of a rate hike in September.

The Greenback may regain its ground on increased risk aversion amid escalating hostilities between the United States (US) and Iran. The US has launched its ninth consecutive night of strikes against Iranian targets. In response, Iranian officials declared that the ceasefire between the two nations has been effectively abandoned, opening the door for deepening disruptions to crucial energy pathways through the region's narrow waterways.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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

FXStreet

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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