Rupiah Weakens Against US Dollar, BI Explains Influencing Factors

INDONESIAUPDATES.COM, News En – On Thursday (June 20, 2024), the exchange rate of the Rupiah against the US dollar weakened by 65 points (0.4%) to Rp16,430 per US dollar at the end of trading. Governor of Bank Indonesia (BI) Perry Warjiyo explained the factors that influenced the weakening of the Rupiah exchange rate in a meeting with President Joko Widodo (Jokowi) and the Financial System Stability Committee (KSSK) at the Presidential Palace in Jakarta.

Although weakened, Perry believes that the Rupiah’s fundamentals are still strong. This weakening is more due to market sentiment. “Fundamentally, the Rupiah is still good. The recent weakening is more because of sentiment. Fundamentals in the future, the Rupiah will strengthen. Only month-to-month movements depend on these sentiments, but the trend is that the Rupiah will strengthen,” said Perry.

Perry explained that exchange rate developments are always influenced by fundamental factors and short-term sentiment. Fundamentally, Perry assesses that the Rupiah exchange rate will strengthen. “The fundamental that influences the strengthening of the Rupiah is lower inflation, the latest being 2.8%. Our (economic) growth is also high at 5.1%. Credit has also increased by 12%. Likewise our economic conditions, including Indonesian investment returns which is good,” Perry said.

Meanwhile, short-term sentiment has a negative impact on the Rupiah, namely in May 2024 there will be geopolitical tensions in the Middle East, and the Fed Fund Rate will be canceled three times. At that time, continued Perry, Bank Indonesia intervened and raised interest rates. As a result, the value of the Rupiah strengthened from IDR 16,600 to IDR 15,900. “This shows that the Rupiah strengthened as soon as short-term sentiments ended. The Rupiah, which had strengthened by IDR 15,900, is now weakening again. The global factor is still the Fed Funds Rate, this is still guessing until the end of the year, how many times it will fall. Our estimate is only once, only just at the end of the year,” he explained.

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Apart from that, the global sentiment that has an impact on the weakening of the Rupiah is the European Central Bank (ECB) which has started to lower interest rates. Meanwhile, domestic sentiment affected the Rupiah, namely in the second quarter, especially June 2024, there was an increase in demand for USD by corporations. “Usually in the second quarter, corporations need to repatriate dividends. They also need to pay debts. However, usually in the third quarter there will be no more,” said Perry.

Apart from that, another factor is related to the perception of future fiscal sustainability. This is considered to create sentiments that put pressure on the Rupiah exchange rate.

FAQ: Rupiah’s Recent Weakening Against the US Dollar

1. Why is the Rupiah weakening against the US Dollar?

The Rupiah’s recent weakening is due to a combination of factors:

  • Short-term Sentiment:
    • Geopolitical tensions in May 2024
    • Uncertainty surrounding future Fed Fund Rate hikes
    • European Central Bank lowering interest rates
    • Increased demand for USD by corporations in Q2 2024
    • Concerns about Indonesia’s future fiscal sustainability
  • Long-term Fundamentals (considered positive by BI):
    • Low inflation (2.8%)
    • High economic growth (5.1%)
    • Increasing credit (12%)
    • Good Indonesian investment returns

2. Is this weakening a cause for concern?

According to Bank Indonesia (BI), the weakening is temporary. They believe the Rupiah’s strong fundamentals will lead to appreciation in the long run. However, the short-term fluctuations can impact businesses that rely on foreign currency.

3. What is Bank Indonesia doing to address the situation?

Previously, BI intervened by raising interest rates when faced with negative short-term sentiment. They predict the Fed Funds Rate will only decrease once by the end of the year.

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4. What can we expect in the coming months?

BI expects the Rupiah to strengthen as short-term pressures subside. However, global factors like the Fed Rate and corporate demand for USD may cause some volatility.

5. Where can I find more information?

You can find more information by searching online for news articles about the Rupiah exchange rate and Bank Indonesia’s monetary policy.