Indonesian Rupiah gains as US Dollar weakens ahead of Fed rate decision

USD/IDR declines as the US Dollar weakens ahead of the Federal Reserve's rate decision.
Strong US inflation data drives a 92.4% market expectation for a Fed rate hike.
Domestic economic weakness and rising global risks could pressure IDR against USD.

Akhtar Faruqui FXStreet

USD/IDR halts its four-day winning streak, trading around 17,740 during Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) declines ahead of the interest rate decision by the Federal Reserve (Fed).

However, the Greenback may rebound as hotter-than-expected, released last week, US inflation data that solidified expectations of further monetary tightening by the Federal Reserve. Financial markets broadly anticipate a 25 basis point rate hike at the upcoming policy meeting, which would lift the benchmark overnight rate to a range of 3.75% to 4.00%. Data from the CME FedWatch tool indicates that traders are pricing in nearly a 92.4% probability of this quarter-point increase, alongside expectations that the Fed will signal additional rate hikes ahead.

The USD/IDR pair may regain ground as the Indonesian Rupiah (IDR) faces mounting pressure from both domestic and international headwinds. On the home front, Indonesia's recovery is slowed by persistent weakness in August factory activity, fragile consumer sentiment, and decelerating retail sales growth. Compounding these internal challenges are heightened external risks, including surging global crude oil prices driven by Middle East tensions, elevated international bond yields, and cautious foreign investors pulling back from Indonesian assets.

Indonesia reshuffle sees third finance minister in under two years

Analysts at Commerzbank highlight the latest bout of policy uncertainty in Indonesia, noting that President Prabowo Subianto “abruptly dismissed Finance Minister Purbaya Yudhi Sadewa yesterday after around one year in office.” They add that Deputy Finance Minister Suahasil Nazara has been elevated to the top job, “making him Indonesia’s third finance minister in less than two years,” a rapid turnover that underscores lingering questions over the stability and continuity of fiscal policymaking.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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.

AUD/USD hangs close to monthly lows, still defends 0.7100 ahead of Fed decision

AUD/USD retains its negative bias for the third straight day, defending 0.7100 while trading close to a monthly low in Wednesday's Asian session on Wednesday. The US Dollar stands firm near a two-week high as the anticipated Fed rate hike and oil-driven inflation fears continue to push US bond yields to a multi-year high. Furthermore, escalating Middle East tensions benefit the safe-haven buck and weigh on the risk-sensitive Aussie.

USD/JPY holds firm above 155.00, awaits Fed policy announcements

USD/JPY climbs to a fresh one-week high above 155.00 in the Asian session on Wednesday amid a bullish US Dollar. Oil-driven inflation fears, along with the anticipated Fed rate hike, continue to support surging US bond yields. Moreover, rising US-Iran tensions underpin the USD's reserve currency status. The pair, however, remains below the mid-155.00s as bulls seem hesitant ahead of the Fed decision later today and the BoJ meeting, starting on Thursday.

Gold clings to recovery gains above $4,300, awaits Fed

Gold struggles to capitalize on its modest intraday move higher and remains below the $4,350 level in European trading on Wednesday. The US Dollar pauses for a breather after touching a two-week high and offers some support to the commodity. Traders, however, seem hesitant to place aggressive directional bets and opt to wait on the sidelines heading into the key Fed event risk.

Bitcoin, Ethereum, and Ripple retreat as Fed rate decision looms

Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP) remain under pressure and consolidate at the time of writing on Wednesday after falling more than 3%, 4% and 9%, respectively, as the Clarity Act failed to advance in the Senate on Tuesday.

Fed decision in focus

Starting with the most important, the Fed decision. Heading into the event, data showed a rather punchy US August jobs report, which, you will likely recall, triggered a hawkish Fed rate repricing in rates markets. However, the recent US August CPI print mattered more.

How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.