Indonesian Rupiah strengthens amid Prabowo's growth target, weaker US Dollar
- Subdued volume during Indonesia's Independence Day holiday may lead to thin trading conditions for the USD/IDR pair.
- President Prabowo projected 6% GDP growth next year, boosting investor sentiment for the Indonesian Rupiah.
- The US Dollar weakened following unexpected drops in July Retail Sales and reduced Fed rate hike bets.
USD/IDR extends its losses for the second successive day, trading around 17,820 during the Asian hours on Monday. The pair may face thin trading conditions as trading volumes remain subdued amid Indonesia’s Independence Day holiday.
However, the Indonesian Rupiah (IDR) found support following an optimistic Independence Day address to parliament by President Prabowo. Sentiment was lifted as he projected that GDP growth could reach 6% by next year, driven by ongoing investment realization and steady job creation. To further enhance fiscal credibility, the government plans to retain a portion of state-owned companies’ dividends, using the funds to construct a fiscal buffer and accelerate debt reduction.
Meanwhile, the USD/IDR pair depreciated alongside a broader decline in the US Dollar (USD), triggered by weaker-than-expected US economic data and shifting central bank expectations. According to the US Census Bureau, July Retail Sales dropped 0.6% month-over-month, reversing June's 0.2% increase and missing the market consensus of 0.1% growth. On an annual basis, Retail Sales grew by 5.0% in July, slowing from the 6.8% expansion recorded in the previous month.
In response to a wave of softer economic reports, including CPI, PPI, and Retail Sales, traders have significantly scaled back their expectations for Federal Reserve rate hikes. According to the CME FedWatch tool, markets are now pricing in just a 30.1% probability of a rate hike next month, a sharp decrease from the 52.2% chance estimated a week ago.
Carry backdrop underpinned as Fed hike expectations ease
Strategists at OCBC say the environment remains supportive for carry trades, with “carry still favoured” as “lower Fed rate hike expectations, driven by benign inflation and softer labour market data, together with sticky long-end Treasury yields, have supported a steeper US yield curve.” They note that this combination of subdued policy tightening risks and a steeper curve continues to underpin demand for yield across currencies.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.