Indonesian Rupiah weakens as Fed rate hike odds lift US Dollar

USD/IDR extends its gains for the second successive day, trading around 17,700 during the Asian hours on Monday. The pair gains ground as the US Dollar (USD) recovers its daily losses, driven by stronger-than-expected United States (US) employment data fuels expectations of an imminent Federal Reserve interest rate hike.

According to the US Bureau of Labor Statistics, August Nonfarm Payrolls rose by 162,000, significantly outperforming the 56,000 forecast. Meanwhile, the unemployment rate held steady at 4.1%, and annual wage growth slowed less than anticipated to 3.1%. Following these figures, traders rapidly priced in tighter monetary policy, with the CME FedWatch tool indicating a 58.3% probability of a 25-basis-point Fed rate increase in September.

Additionally, the Greenback receives support as rising crude oil prices have stoked fears of rekindled inflationary pressures following a geopolitical escalation between the US and Iran over the weekend. The conflict intensified after the US targeted three Iranian tankers in response to missile attacks on its warships, leading Tehran to establish a new restricted zone around the Strait of Hormuz.

The upside of the USD/IDR pair could be restrained as the Indonesian Rupiah (IDR) may find support as sentiment was supported by stronger external buffers and signs of fiscal prudence.

Indonesia’s forex reserves for August rose to a five-month high of USD 146.5 billion, helped by government withdrawals of external loans. Meanwhile, the government’s plan to lower the 2027 fiscal deficit to 2.4% of GDP from 2.68% this year reinforced views of tighter fiscal management.

Analysts at OCBC highlight that, speaking at the Sarasehan 100 Ekonom Indonesia in Jakarta last week, Bank Indonesia Governor Destry Damayanti doubled down on her recent guidance, reinforcing the “stability-first” message she had set out earlier. They note that Destry stressed that policy cannot be framed purely through a domestic inflation lens, given the “higher-for-longer” global rate environment and the imperative to keep Indonesian assets “attractive to foreign investors,” underscoring BI’s focus on safeguarding the Rupiah and macro stability even as it continues to support growth.