Rupiah Retreats Amid BI Decision and Dollar Moves

Key Moments

USD/IDR trades near 18,020 in Asian hours after giving back more than 0.5% of the prior session’s gains.
Bank Indonesia unexpectedly keeps its benchmark rate at 5.75% in July, favoring targeted FX measures over further hikes.
Fed funds futures imply a 35.8% chance of a July rate hike and an 82.1% probability of at least a 25 bp move in September.

Rupiah Eases After Prior Session Rally

USD/IDR is retreating during Asian trading on Friday, hovering around 18,020 after climbing more than 0.5% in the previous session. The current pullback comes as the Indonesian rupiah responds to Bank Indonesia’s surprise decision to leave interest rates unchanged at 5.75% in July.

Instead of lifting borrowing costs further to bolster the currency, the central bank is prioritizing targeted measures aimed at stabilizing the rupiah. This approach shapes expectations that USD/IDR may regain upward momentum despite the latest move lower.

Policy Choices, Fiscal Moves, and Oil Prices Shape Rupiah Outlook

Policymakers’ decision to keep rates steady is occurring alongside proposed cuts in defense spending, which are intended to support Indonesia’s broader fiscal position. These efforts, however, face a counterweight from rising global crude prices.

Higher oil prices are adding to inflation pressures, limiting the rupiah’s room to appreciate and effectively capping its potential upside. This tension between fiscal consolidation and imported inflation remains a key factor for the currency’s path.

Dollar Struggles Despite Safe-Haven Demand

The US Dollar is under pressure even as risk aversion increases amid intensifying conflicts in the Middle East. Escalating US-Iran tensions are driving crude oil prices higher, reinforcing concerns about an oil-led spike in inflation.

Expectations that the US Federal Reserve could resume rate hikes have firmed against this backdrop. An increase in energy-driven inflation is feeding market speculation that further tightening may be required.

Market-Implied Fed Path

Data from the CME FedWatch tool indicate that money markets currently assign a 35.8% probability to a Federal Reserve rate hike this month. For September, pricing reflects an 82.1% chance of at least a quarter-point increase.

Event	Implied Probability
Fed rate hike this month	35.8%
At least 25 bp hike in September	82.1%

Understanding Risk Sentiment in Markets

Risk-On vs Risk-Off

In financial markets, the terms “risk-on” and “risk-off” describe how much risk investors are prepared to take during a given period. In a risk-on environment, investors are more optimistic about future conditions and show a greater appetite for higher-risk assets. In a risk-off backdrop, investors become more cautious about the outlook and prefer safer assets that are viewed as more reliable sources of return, even if those returns are relatively modest.

Key Assets to Watch for Sentiment Shifts

During risk-on phases, equity markets generally advance and most commodities, apart from Gold, typically move higher as they benefit from expectations of stronger growth. Currencies of major commodity exporters tend to strengthen, and Cryptocurrencies also tend to gain.

In risk-off periods, Bonds – especially major government issues – usually rise, Gold tends to outperform, and safe-haven currencies such as the Japanese Yen, Swiss Franc, and US Dollar see increased demand.

Currencies Favored in Risk-On Conditions

The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and some smaller currencies such as the Ruble (RUB) and South African Rand (ZAR) typically appreciate in risk-on markets. Their underlying economies rely heavily on commodity exports, and commodity prices often climb when investors anticipate stronger economic activity and higher future demand for raw materials.

Currencies Favored in Risk-Off Conditions

The main currencies that tend to strengthen when risk appetite deteriorates are the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF). The US Dollar benefits from its role as the world’s reserve currency and from demand for US government debt, which is viewed as secure because the largest global economy is considered unlikely to default.

The Yen gains support from demand for Japanese government bonds, which are largely held by domestic investors, making large-scale selling less likely even during crises. The Swiss Franc is underpinned by strict Swiss banking regulations, which are seen as providing investors with greater capital protection.