Indonesian Rupiah faces foreign outflow pressures amid weaker market sentiment

• Indonesian Rupiah weakens due to foreign capital outflows and a drop in the IDX Composite.
• Bank Indonesia intervenes via spot, NDF, and bond markets to support the struggling IDR.
• US Dollar softens as Middle East diplomatic efforts lower expectations for a Fed rate hike.

USD/IDR gains ground after three days of losses, trading around 18,180 during Asian hours on Friday. The pair continues to appreciate as the Indonesian Rupiah (IDR) faces downward pressure from potential foreign capital outflows.

Sentiment in Indonesia remains fragile, with the domestic stock market struggling as the IDX Composite fell 1.29% to trade around 5,030 during Asian trading hours on Friday. This decline was largely driven by weaker US stock futures following a sharp, historic drop in Alphabet’s share price overnight, which dragged Wall Street lower and reignited broader market concerns regarding the return on massive artificial intelligence investments.

Adding to the economic pressure, Indonesia is grappling with persistent political tensions marked by ongoing student protests in major cities since early October. The Rupiah's weakness is further exacerbated by fiscal worries stemming from elevated oil prices, sustained net foreign selling, and mounting inflation concerns ahead of next week’s October inflation data release. However, the Rupiah may find a floor as Bank Indonesia reiterated its commitment to stabilizing the local currency through active spot, NDF, and DNDF interventions, as well as targeted government bond purchases in the secondary market.

Meanwhile, the upside for the USD/IDR pair could be limited by broader weakness in the US Dollar (USD). The Greenback has eased due to reduced safe-haven demand, bolstered by growing optimism over US-led diplomatic efforts to de-escalate tensions in the Middle East. As fears of oil supply disruptions and energy-driven inflation recede, market expectations for another Federal Reserve rate hike at its upcoming December meeting have softened. According to the CME FedWatch Tool, traders are now pricing in roughly a 75% probability of a 25-basis-point rate increase, down noticeably from 84.2% a day earlier.

US growth surprise reinforces Dollar strength narrative

Commerzbank’s Michael Pfister notes that “yesterday’s US growth figures for the third quarter were a pleasant surprise,” with GDP expanding at “3.4% annualised quarter-on-quarter” versus expectations for “3.2%.” He argues that, “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,” pointing out that “the US economy is growing significantly faster than those of all the other G10 countries.” Against this backdrop, Pfister contends that the latest data further underpins the Dollar’s fundamental advantage, as solid US growth continues to distinguish it from its G10 peers.