Rupiah Slips as Safe-Haven Demand Lifts Dollar

Key Moments

Dollar Strengthens as Geopolitical Risks Rise

USD/IDR advanced during Asian trading on Monday, with the pair hovering around 18,180 after the Indonesian Rupiah weakened following gains in the prior session. The move coincided with renewed demand for the US Dollar as geopolitical risks intensified in the Middle East.

According to Bloomberg, US Central Command (CENTCOM) carried out additional airstrikes on Sunday evening aimed at reducing Iran’s ability to target civilian ships moving through key waterways. Reuters reported that US forces have hit more than 300 Iranian targets across three nights, including 140 targets on Saturday alone. The heightened military activity has led Washington and Tehran to issue conflicting statements on whether the strategic strait remains accessible to maritime traffic.

Inflation Concerns and Fed Expectations Support the Greenback

Beyond the direct geopolitical backdrop, the US Dollar was further supported as the US-Iran missile exchanges pushed oil prices higher, reviving concerns about inflation and the potential for interest rates to stay elevated for longer. Market participants are now focusing on Tuesday’s release of US Consumer Price Index (CPI) figures for further guidance on the Federal Reserve’s policy trajectory.

Expectations are for June headline CPI to fall by 0.1% month-on-month, while core CPI is forecast to increase by 0.3% over the same period. With traders still pricing in one additional rate hike before year-end, monetary policy remains a key driver for currency markets. Fed Chair Kevin Warsh is set to deliver his first official testimony before the US Congress on Tuesday, an event that investors are closely monitoring for clues on the central bank’s stance.

Domestic Equity Strength Offers Support to the Rupiah

Despite the pressure from global risk aversion, the Indonesian Rupiah may find support from improving domestic market dynamics. Indonesian equities rose for a second consecutive session, led by cyclical sectors, infrastructure, basic materials, and energy.

Investor sentiment toward Indonesia was helped by data pointing to solid investment momentum in strategic sectors within the country’s special economic zones, a development seen as encouraging for broader emerging-market capital flows. Since foreign institutional investors must convert foreign currency into Rupiah to buy local shares, these inflows generate direct demand for IDR, providing a structural buffer for the currency even as external headwinds intensify.

Understanding Risk Sentiment in Financial Markets

The article also outlines key concepts related to market risk appetite and how they affect different asset classes and currencies.

What Do “Risk-On” and “Risk-Off” Mean?

In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Assets to Watch for Risk Sentiment Shifts

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Currencies That Benefit in “Risk-On” Environments

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Currencies Favored in “Risk-Off” Markets

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.