Indonesian Rupiah weakens as US Dollar gains amid rising Treasury yields
- USD/INR appreciates amid rising Treasury yields and high oil prices.
- Treasury yields hit multi-decade highs on energy-driven inflation fears, with the 10-year reaching 5.34% and the 30-year rising to 5.681%.
- Indonesia's YoY inflation rose to a three-month high of 3.28% in September, driven by El Niño-related food costs.
USD/IDR gains ground after two days of losses, trading around 17,980 during European hours on Thursday. The pair appreciates as the US Dollar (USD) rises amid elevated oil prices, while Treasury yields continue to offset the support from lower Fed rate-hike odds.
Meanwhile, geopolitical uncertainty persists as the US and Iran have made little progress in negotiations, even amid signs of recovering Middle East oil flows. Markets remain cautious about the durability of this supply recovery without a formal resolution to end the conflict, especially with both Washington and Tehran claiming control over the strategic waterway.
Treasury yields also climbed to multi-decade highs amid concerns over persistent energy-driven inflation, which could prompt tighter monetary policy. The 10-year Treasury yield rose to 5.34%, while the 30-year Treasury yield climbed to 5.681%.
However, Federal Reserve rate hike expectations eased following softer-than-expected inflation data released on Wednesday. The CME FedWatch Tool shows that markets now price in roughly a 39% chance of a Fed rate hike in October, down from nearly 51% prior to the PCE release. Market focus now turns to Friday’s US Nonfarm Payrolls report, where consensus forecasts expect 90,000 jobs added in September and the unemployment rate to hold steady at 4.1%.
Inflation worries deepened in Indonesia as headline inflation accelerated to 3.28% year-over-year (YoY) in September, a three-month high, driven by persistent food-price pressures stemming from El Niño effects. As a net oil importer, Indonesia faces additional fiscal pressures and elevated import costs from high crude oil prices.
Despite these headwinds, stronger-than-expected August trade data offered some support to the Rupiah, even as import growth significantly outpaced exports. Meanwhile, Bank Indonesia (BI) actively supported market liquidity and stabilized the rupiah through secondary-market bond purchases alongside spot, domestic non-deliverable forward (DNDF), and offshore NDF interventions.
Fed urgency seen easing but December hike still in focus
Analysts at Deutsche Bank highlight that the softer US PCE revisions have tempered expectations for near-term policy action, noting that “our US economists see the print as reducing the urgency for the Fed to act in October.” However, they stress that “with inflation still well above target, they maintain the expectation of the next hike in December,” keeping a year-end tightening move firmly on the radar.
Interest rates FAQs
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.
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.
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.
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.