Rupiah Advances as Capital Inflows Boost Sentiment

Key Moments

Rupiah Strengthens as Capital Inflows Improve Sentiment

USD/IDR remained under pressure for a fourth straight session, trading near 17,990 during Asian hours on Friday. The pair’s decline reflects a stronger Indonesian Rupiah, helped by improving investor confidence.

Foreign direct investment rose 27.4% year-over-year in the second quarter. As a result, demand for Indonesian assets has increased. Meanwhile, authorities continue efforts to manage domestic price pressures.

The government is taking steps to control food prices amid El Niño-related supply risks. In addition, June inflation moved closer to the upper end of Bank Indonesia’s target range.

Middle East Risks Provide Support for the US Dollar

However, further USD/IDR declines may face resistance from factors supporting the US Dollar. Rising Middle East tensions have increased concerns about global energy supplies. Therefore, investors have turned toward safe-haven assets, including the Greenback.

Reuters reported that Iran asked Yemen’s Houthis to prepare for a possible shutdown of the Red Sea oil route if the US strikes Iranian power facilities. Such a move could threaten global energy flows. Furthermore, reports of explosions in Bandar Abbas, Qeshm, and Ahvaz added to market uncertainty.

Soft US Inflation Reduces Fed Rate Hike Expectations

Despite geopolitical risks, the Dollar’s gains remain limited. Softer-than-expected US inflation data has reduced expectations for immediate Federal Reserve rate increases.

Earlier this week, data showed that US consumer prices rose less than economists expected in June. At the same time, producer prices unexpectedly declined. Initial jobless claims also fell to a two-month low.

Following these reports, markets have largely priced out a Fed rate hike this month. However, investors remain divided over whether policymakers could act in September.

How Risk Sentiment Affects Markets

In financial markets, “risk-on” and “risk-off” describe investor attitudes toward uncertainty. During risk-on periods, traders feel more confident and buy assets with higher potential returns. By contrast, risk-off periods push investors toward safer assets.

Typically, risk-on markets support equities and most commodities. Gold is an exception because investors often use it as a hedge during uncertainty. Commodity-linked currencies also tend to benefit because stronger growth expectations increase demand for raw materials.

As a result, currencies such as the Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD) often perform well during risk-on conditions. Emerging-market currencies may also gain when investors seek higher returns.

Safe-Haven Currencies During Market Stress

On the other hand, risk-off conditions usually benefit safe-haven currencies. The US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) often attract demand during periods of market stress.

The US Dollar benefits from its role as the world’s reserve currency. Investors also seek US government bonds during crises because they are viewed as highly secure.

Meanwhile, the Japanese Yen gains from demand for Japanese government bonds. A large share of these bonds is held by domestic investors, which supports stability during uncertain periods.

The Swiss Franc also attracts investors because Switzerland’s financial system is viewed as a safe store of capital. Therefore, the currency often strengthens when global risk appetite declines.