Indonesian Rupiah gains against US Dollar amid shift in safe-haven demand

• Disappointing US technology earnings fuel doubts about the AI trade’s sustainability, weakening the US Dollar as USD/IDR advances.
• Elevated oil prices, El Niño-driven food inflation and concerns over a market classification dispute help limit USD/IDR’s downside.
• Following MSCI’s demotion warnings over concerns about coordinated share trading, OJK imposed fines of 2.1 trillion rupiah.

Quarterly US earnings from several megacap technology companies fell short of expectations, denting investor confidence and raising further questions about the sustainability of the AI trade. Against that backdrop, the US Dollar (USD) remains under pressure, with USD/IDR edging down to around 18,110 in Friday’s Asian session after two days of gains.

Escalating conflict in the Middle East has also encouraged a broader retreat from risk. Demand for safe-haven currencies has strengthened on reports that the US and Israel are preparing further military strikes against Iran after the forthcoming midterm elections, supporting both the Japanese Yen and Swiss Franc against the Greenback.

For their part, Federal Reserve (Fed) officials have shown little inclination to step up the pace of monetary tightening. Although Fed Chair Kevin Warsh recently sounded upbeat about the US economy’s underlying strength, he offered no signal on whether further interest rate increases would be necessary. Despite that measured message, pricing tracked by the CME FedWatch Tool currently puts the probability of unchanged rates at the forthcoming 27–28 October policy meeting at 92.8%.

Several domestic headwinds facing the Indonesian Rupiah (IDR) could, however, limit further declines in USD/IDR. Rising global oil prices have intensified concerns about the fiscal outlook, while a sharper increase in food prices associated with El Niño continues to underpin inflationary pressures. Sentiment has also suffered following President Prabowo Subianto’s forceful criticism of MSCI’s proposed revisions to Indonesia’s market classification, adding to concerns about possible foreign capital outflows.

Addressing regulatory concerns, Indonesia’s financial regulator, the OJK, delivered sanction letters late on Wednesday to parties found to have breached trading rules involving three listed companies. The penalties totalled 2.1 trillion rupiah ($116.67 million). OJK presented the fines as an important element of wider capital market reforms, after MSCI warned that Indonesian equities could be downgraded from "emerging" to "standalone" market status unless adequate steps were taken to tackle coordinated share trading practices.

BI favours targeted rupiah stabilisation rather than rate rises

Recent foreign exchange operations by Bank Indonesia have played a pivotal role in its policy stance, according to Philip Wee of DBS Group Research. DBS says that “together with continued intervention in spot and forward FX markets, these measures underscored BI’s preference for targeted currency stabilisation over outright monetary tightening from MSCI-led market volatility.” In DBS’s assessment, this represents a conscious decision to use foreign exchange operations and targeted instruments to address index-related market pressure, rather than immediately raising policy rates.