Why is the Indonesian Rupiah strengthening against the US Dollar as safe-haven demand shifts?

• USD/IDR advances despite a softer US Dollar, as doubts mount over whether the AI trade can last.
• Further USD/IDR losses face constraints from elevated oil prices, El Niño-driven food inflation and concerns over the market classification dispute.
• Following MSCI’s downgrade warnings linked to coordinated stock trading concerns, OJK imposed fines of 2.1 trillion rupiah.

USD/IDR edges down in Friday’s Asian session, hovering near 18,110 after advancing for two days. Weighing on the pair is a struggling US Dollar (USD), with investors increasingly questioning whether the AI trade is sustainable. Confidence suffered after quarterly earnings from several US megacap technology companies fell short of expectations.

Risk aversion has also spread across markets as the geopolitical conflict in the Middle East escalates. Demand for safe-haven currencies has strengthened on reports that the US and Israel are preparing further military strikes against Iran after the upcoming midterm elections. Both the Japanese Yen and Swiss Franc have consequently gained support against the Greenback.

On monetary policy, Federal Reserve (Fed) officials have shown no pressing need to step up tightening. While recently voicing optimism about the US economy’s underlying strength, Fed Chair Kevin Warsh stopped short of indicating whether further interest rate increases would be necessary. Against this measured guidance, pricing by market participants using the CME FedWatch Tool currently implies a 92.8% chance of rates remaining unchanged at the upcoming October 27–28 policy meeting.

Domestic pressures on the Indonesian Rupiah (IDR) could limit further declines in USD/IDR. Fiscal worries have increased with higher global oil prices, while a sharper El Niño-related rise in food costs continues to underpin inflationary pressures. Sentiment has also deteriorated following President Prabowo Subianto’s strong criticism of MSCI’s proposed changes to Indonesia’s market classification, adding to concerns about possible foreign capital outflows.

Addressing regulatory concerns, Indonesia’s financial regulator, the OJK, delivered sanction letters late on Wednesday to parties found to have breached trading rules involving three listed companies. The penalties totalled 2.1 trillion rupiah ($116.67 million). OJK described the sanctions as an important component of wider capital market reforms. They followed MSCI’s warning that Indonesian equities could be downgraded from "emerging" to "standalone" market status unless sufficient steps were taken to tackle coordinated stock trading practices.

Why does Rupiah support point to BI’s preference for targeted stabilisation rather than rate hikes?

Recent foreign exchange market operations by Bank Indonesia have been pivotal to its policy stance, according to Philip Wee of DBS Group Research. DBS states that “together with continued intervention in spot and forward FX markets, these measures underscored BI’s preference for targeted currency stabilisation over outright monetary tightening from MSCI-led market volatility.” In their assessment, the strategy represents a conscious decision to rely on FX operations and targeted instruments, instead of immediately raising policy rates to counter index-related market pressures.