Key Moments
- USD/IDR advanced for a third straight session, trading near 17,980 during Wednesday’s European session.
- Market-based odds for a Fed rate hike in December rose to about 85.5%, up from 61% before last week’s FOMC meeting.
- Indonesia’s inflation quickened to 3.08% year-on-year in May from 2.42%, adding pressure on the Rupiah ahead of June CPI data.
Dollar Strength Pushes USD/IDR Higher
USD/IDR extended its upward momentum for the third consecutive session, trading around 17,980 during European hours on Wednesday. The move reflected persistent U.S. Dollar strength, supported by expectations that the Federal Reserve could deliver additional policy tightening.
Pricing derived from the CME FedWatch tool showed that market participants raised the probability of a December Fed rate increase to nearly 85.5%, compared with 61% prior to last week’s Federal Open Market Committee (FOMC) meeting. The shift in rate expectations has been a key driver behind the Greenback’s latest advance.
Solid U.S. PMI Data Reinforces Hawkish Fed Outlook
Fresh U.S. activity data added to the bullish Dollar narrative. The U.S. S&P Global Composite Purchasing Managers’ Index (PMI) rose to 52.2 in June, up from 51.5 in May, signaling an ongoing expansion in overall business activity.
The manufacturing sector stood out, with output climbing to 55.7 from 55.1 previously, easily beating forecasts of 54.8. The services side of the economy also improved, with the Services PMI printing at 51.3, up from May’s 50.7 and above the 51.0 consensus, pointing to resilient demand in the broader service sector.
| U.S. PMI Indicators | Latest Reading | Previous | Consensus (if stated) |
|---|---|---|---|
| S&P Global Composite PMI (June) | 52.2 | 51.5 | Not specified |
| Manufacturing Output | 55.7 | 55.1 | 54.8 |
| Services PMI (June) | 51.3 | 50.7 | 51.0 |
Geopolitical Tensions Add Support to the Greenback
The U.S. Dollar also drew backing from geopolitical uncertainty related to the United States-Iran peace process. The article noted that U.S. President Donald Trump said Iran had “fully and completely” agreed to open its facilities to nuclear inspections, while Iranian Foreign Minister Abbas Araghchi cautioned that substantive nuclear talks had not yet started.
In addition, Iran’s chief negotiator warned that the Strait of Hormuz would not return to its pre-war condition and would remain under Iranian control. At the same time, diplomatic efforts showed movement elsewhere, with Washington hosting a new round of negotiations between Israel and Lebanon aimed at achieving a ceasefire with Iran-backed Hezbollah.
Rupiah Pressured by Inflation Concerns and Investment Risks
The Indonesian Rupiah came under selling pressure as investors turned cautious ahead of Indonesia’s June CPI release next week. Market participants were concerned that elevated food prices could keep inflation pressures intact.
This follows a notable pickup in annual inflation to 3.08% in May, compared with 2.42% previously. On the structural side, the currency faced an additional headwind from indications that major Japanese automakers may shift production to Vietnam, potentially weighing on future foreign capital inflows into Indonesian assets.
Understanding Risk Sentiment Dynamics
The article also reviewed how broader risk sentiment typically influences asset classes and currencies.
Definitions of “Risk-on” and “Risk-off”
In financial markets, “risk-on” and “risk-off” describe how much risk investors are prepared to accept in a given period. In a “risk-on” environment, investors are generally positive about the outlook and more inclined to buy higher-risk assets. In a “risk-off” setting, they become more defensive and favor safer instruments that are perceived as more reliable, even if returns are modest.
Key Assets to Watch for Risk Sentiment
During “risk-on” phases, equity markets typically advance and most commodities apart from Gold tend to gain, as they benefit from expectations of stronger growth. Currencies tied to commodity-exporting economies usually appreciate, and Cryptocurrencies also tend to rise. In “risk-off” periods, Bonds – particularly major government debt – generally strengthen, Gold often benefits, and safe-haven currencies such as the Japanese Yen, Swiss Franc, and U.S. Dollar usually attract demand.
Currencies Favored in “Risk-on” vs. “Risk-off”
In a “risk-on” backdrop, the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and some smaller currencies like the Ruble (RUB) and South African Rand (ZAR) often appreciate, reflecting the commodity dependence of their economies and the typical rise in commodity prices when growth expectations improve.
In contrast, during “risk-off” conditions, the U.S. Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) tend to strengthen. The U.S. Dollar benefits from its role as the world’s reserve currency and the perceived safety of U.S. government debt. The Yen is supported by demand for Japanese government bonds, a large share of which is held domestically, while the Swiss Franc gains from Switzerland’s banking regulations that are seen as offering strong capital protection.
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