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Indonesian Rupiah hits record low vs USD on Middle East risks; USD/IDR approaches 17,200

  • USD/IDR sticks to bullish bias as economic concerns continue to undermine the Indonesian Rupiah.
  • Hormuz risks offer some support to the safe-haven USD, lending additional support to spot prices.
  • Iran diplomacy hopes and fading Fed rate hike bets might cap the USD, and cap gains for the pair.

The USD/IDR pair catches aggressive bids during the Asian session on Friday and advances to a fresh all-time peak, around 17,185-17,190 region in the lar hour. Spot prices remain on track to register strong weekly gains and seem poised to appreciate further.

The Indonesian Rupiah (IDR) continues to underperform on the back of economic risks stemming from the ongoing conflict in the Middle East. As Indonesia is a net Oil importer, the war-driven surge in energy prices has increased the country's import and subsidy costs. Adding to this, geopolitical tensions led to capital outflows from Indonesia's bond and equity markets as investors moved into safer assets, like the US Dollar (USD). This has been a key factor behind the recent move up in the USD/IDR pair witnessed over the past month or so.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, is looking to build on the overnight recovery from its lowest level since late February, due to uncertainty around the Strait of Hormuz. Meanwhile, a 10-day truce between Israel and Lebanon fueled hopes about a potential US-Iran peace deal. This, in turn, remains supportive of a positive risk tone, which, along with diminishing odds for a rate hike by the US Federal Reserve (Fed), keeps a lid on any meaningful appreciation for the USD and might keep a lid on the USD/IDR pair.

(This story was corrected on April 17 at 08:02 GMT to rectify the USD/IDR pair's all-time high level to 17,185-17,190.)

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

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Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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Indonesian Rupiah hits record low vs USD as USD/IDR bullish bias holds