Indonesian Rupiah declines as US Dollar gains on Fed rate hike bets

USD/IDR extends its gains for the second successive day, trading around 17,810 during the European hours on Wednesday. The pair appreciates as the US Dollar (USD) rises amid rising bond yields and surging oil prices, which have reignited concerns over persistent inflation and the likelihood of potential Fed interest rate hikes.

Driven by a global bond selloff, the US 10-year Treasury yield surged to 4.80%, reaching its highest level since early 2025. Compounding these inflationary pressures, crude oil prices jumped significantly following escalating hostilities between the United States and Iran, intensifying worries over potential energy flow disruptions from the Middle East.

Meanwhile, recent economic data from the US offers a mixed backdrop for broader market sentiment. July JOLTS job openings fell below market expectations at 7.27 million, while the ISM Manufacturing PMI eased slightly from 55.6 to 54.6 in August. Despite missing forecasts, the PMI remains firmly in expansion territory, pointing to a resilient manufacturing sector. Investors are now turning their attention to the upcoming ADP employment report and Friday's Nonfarm Payrolls to gauge the Federal Reserve's next move on interest rates.

Dollar debasement fears linger as focus stays on long-end US bonds

Analysts at ING stress that market attention remains firmly on the long end of the US curve, where “there remains much focus on the long end of bond markets, where little appetite for fiscal consolidation in recent years seems to be coming home to roost.” They note that, as Francesco Pesole highlighted, “there remain fears that Treasury Secretary Scott Bessent will dip into his large toolkit again to support the bond market,” with some investors likely to “look to hit a bid in USD/CHF to express the dollar debasement trade.”

Meanwhile, Indonesia’s price pressures gathered pace in August, with headline inflation accelerating from July’s three-month low, largely driven by rising food costs. Underlying price dynamics also firmed, as core inflation climbed to its highest level since March 2023.

On the policy front, Parliament confirmed Destry Damayanti as Governor of Bank Indonesia. Taking an optimistic stance on the medium-term economic outlook, she raised the country’s 2027 growth forecast to a range of 5.2% to 6.0%, with the upper target representing the fastest expansion pace since 2012.