Indonesian Rupiah strengthens as US Dollar weakens on easing Fed rate hike bets

USD/IDR has pared its recent gains from the previous day, trading around 17,910 during the Asian hours on Friday. The pair depreciates as the US Dollar (USD) declines on easing Federal Reserve (Fed) rate hike bets, with the CME FedWatch Tool suggesting traders are pricing in nearly a 28% chance of an October rate increase.

However, the Greenback could regain its footing due to persistent inflation concerns from elevated energy costs and expectations of a Fed rate hike in December. Benchmark borrowing costs have seen dynamic moves, with 10- and 30-year US Treasury yields holding around 5.25% and 5.62%, respectively, after pulling back from multi-decade highs as fiscal and political instability in France sparked demand for safe-haven assets.

However, US Treasury yields remain near their highest levels since 2002, supported by expectations of further Federal Reserve tightening, underlying resilience in the US economy, and mounting concerns over the nation’s long-term fiscal and debt trajectories. Traders continue to monitor economic indicators for signals on monetary policy direction, with attention focused on upcoming Nonfarm Payrolls data. Economists project an addition of 90,000 jobs, a noticeable moderation from the previous month's 162,000, while the Unemployment Rate is expected to hold steady at 4.1%.

On the domestic front, Bank Indonesia (BI) Governor Destry Damayanti noted that recent rupiah pressure reflected global conditions, shifts in capital flows, and weaknesses in external-sector fundamentals. September headline inflation accelerated to a three-month high of 3.28%, driven by persistent food-price pressures partly linked to El Niño effects.

Analysts at ING’s Asia research team expect Indonesia’s headline price pressures to pick up in the coming months, projecting that “Indonesia’s CPI inflation [will] accelerate to 3.3% YoY, as El Niño drives further increases in food prices.” They highlight that “rising rice prices should remain a key driver,” while cautioning that “spillovers from higher food costs are also likely to add to core inflation,” pointing to a broader build-up in underlying inflationary pressures.