Indonesian Rupiah comes under pressure from foreign outflows amid softer market sentiment

• Foreign capital outflows and a decline in the IDX Composite weigh on the Indonesian Rupiah.
• To shore up the struggling IDR, Bank Indonesia intervenes in spot, NDF and bond markets.
• Middle East diplomacy dampens expectations of a Fed rate rise, leaving the US Dollar softer.

At around 18,180 in Friday’s Asian session, USD/IDR is recovering after three days of declines. The advance continues as the prospect of foreign capital outflows puts the Indonesian Rupiah (IDR) under pressure.

A 1.29% fall took the IDX Composite to around 5,030 during Asian trading on Friday, underscoring fragile sentiment and continued weakness in Indonesia’s equity market. Softer US stock futures were largely behind the decline. They followed a sharp, historic overnight fall in Alphabet’s share price that pulled Wall Street lower and revived wider concerns about returns on substantial artificial intelligence investments.

Persistent political strains are adding to Indonesia’s economic pressures, with student protests continuing in major cities since early October. Fiscal concerns linked to high oil prices, continued net selling by foreign investors and growing inflation worries before next week’s October inflation release are also weighing on the Rupiah. There may, however, be a floor beneath the currency: Bank Indonesia has reaffirmed its commitment to stabilising it through active intervention in spot, NDF and DNDF markets, alongside targeted purchases of government bonds in the secondary market.

Broader US Dollar (USD) weakness could nevertheless restrain further gains in USD/IDR. Growing optimism about US-led diplomatic efforts to ease Middle East tensions has reduced demand for safe havens, putting the Greenback under pressure. With concerns over disrupted oil supplies and energy-led inflation subsiding, expectations of another Federal Reserve rate rise at its forthcoming December meeting have eased. Traders now assign roughly a 75% probability to a 25-basis-point increase, according to the CME FedWatch Tool, notably below the 84.2% priced in a day earlier.

Stronger-than-expected US growth bolsters the case for Dollar strength

GDP growth of “3.4% annualised quarter-on-quarter”, against expectations for “3.2%.”, prompted Commerzbank’s Michael Pfister to observe that “yesterday’s US growth figures for the third quarter were a pleasant surprise,”. In his view, “given everything that has happened this year, it is easy to forget that there has been a strong case for a stronger Dollar in recent years,” particularly as “the US economy is growing significantly faster than those of all the other G10 countries.” Pfister therefore sees the latest figures as further support for the Dollar’s fundamental advantage, with robust US growth continuing to set it apart from its G10 peers.