Indonesian Rupiah declines as US Dollar gains on Fed rate hike bets
- USD/IDR appreciates as the US Dollar advances on Fed rate hike fears.
- Global bond selloff pushed US 10-year Treasury yields to 4.80%.
- Indonesia’s August inflation accelerated on higher food costs, with core inflation reaching its highest level since March 2023.
USD/IDR extends its gains for the second successive day, trading around 17,810 during the European hours on Wednesday. The pair appreciates as the US Dollar (USD) rises amid rising bond yields and surging oil prices, which have reignited concerns over persistent inflation and the likelihood of potential Fed interest rate hikes.
Driven by a global bond selloff, the US 10-year Treasury yield surged to 4.80%, reaching its highest level since early 2025. Compounding these inflationary pressures, crude oil prices jumped significantly following escalating hostilities between the United States and Iran, intensifying worries over potential energy flow disruptions from the Middle East.
Meanwhile, recent economic data from the US offers a mixed backdrop for broader market sentiment. July JOLTS job openings fell below market expectations at 7.27 million, while the ISM Manufacturing PMI eased slightly from 55.6 to 54.6 in August. Despite missing forecasts, the PMI remains firmly in expansion territory, pointing to a resilient manufacturing sector. Investors are now turning their attention to the upcoming ADP employment report and Friday's Nonfarm Payrolls to gauge the Federal Reserve's next move on interest rates.
Dollar debasement fears linger as focus stays on long-end US bonds
Analysts at ING stress that market attention remains firmly on the long end of the US curve, where “there remains much focus on the long end of bond markets, where little appetite for fiscal consolidation in recent years seems to be coming home to roost.” They note that, as Francesco Pesole highlighted, “there remain fears that Treasury Secretary Scott Bessent will dip into his large toolkit again to support the bond market,” with some investors likely to “look to hit a bid in USD/CHF to express the dollar debasement trade.”
Meanwhile, Indonesia’s price pressures gathered pace in August, with headline inflation accelerating from July’s three-month low, largely driven by rising food costs. Underlying price dynamics also firmed, as core inflation climbed to its highest level since March 2023.
On the policy front, Parliament confirmed Destry Damayanti as Governor of Bank Indonesia. Taking an optimistic stance on the medium-term economic outlook, she raised the country’s 2027 growth forecast to a range of 5.2% to 6.0%, with the upper target representing the fastest expansion pace since 2012.
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.