Indonesian Rupiah faces pressure as fiscal concerns, regional tensions and stronger USD cloud outlook

• Fiscal commitments, accelerating inflation and high oil prices intensify risks to the Indonesian Rupiah.
• To keep currency volatility within its tolerance limits, Bank Indonesia continues to intervene in markets.
• Cuts to gas exports to Singapore and Fed rate expectations could support further gains in USD/IDR.

USD/IDR trades near 18,170 during Tuesday’s Asian session. Its four-day advance has ended, with the pair retreating from Monday’s nearly five-month high of 18,216. Fiscal concerns nevertheless leave the Indonesian Rupiah (IDR) exposed to further weakness. High global oil prices and expensive government initiatives are adding pressure. A proposed offer of free education from primary school through university threatens to stretch a budget already weighed down by free school meal programmes. Inflation presents another growing risk: September’s reading accelerated to 3.28%, a three-month high, mainly as El Niño-related food price increases took hold.

Despite greater volatility linked to escalating Middle East tensions, Bank Indonesia (BI) will continue its intervention strategy, Governor Destry Damayanti said, reaffirming the central bank’s policy stance. BI characterised recent exchange rate moves as normal market dynamics and confirmed its continued market presence. Another official said Rupiah fluctuations remained manageable and comfortably within the central bank’s tolerance limits.

Amid rising geopolitical and economic friction with Singapore, Indonesia’s foreign ministry said it would host Singapore’s top diplomat on Tuesday. Tensions centre on recurring haze from Indonesian wildfires and Jakarta’s recent gas export cuts. From Saturday, Jakarta lowered pipelined gas deliveries to Singapore by roughly 8% to protect domestic supplies. The reduction followed warnings by Indonesia’s energy minister that export contracts with uncooperative partners would be reviewed.

Cautious sentiment ahead of Wednesday’s US Federal Reserve policy decision is strengthening the US Dollar (USD), potentially giving USD/IDR further room to rise. Markets widely anticipate unchanged rates at the Fed’s October meeting, with another increase potentially under consideration in December. The CME FedWatch Tool puts the market-implied probability of an October pause at 89.5%, alongside an 82.3% chance of a December rate rise.

US midterms: Dollar resilience expected, longer-term risks persist

A potential shift in congressional control may have limited near-term relevance for the Dollar, according to Thu Lan Nguyen at Commerzbank. She describes the approaching US midterm elections as "likely to be less relevant for USD exchange rates in the short term than the looming shift in power in Congress might suggest." Her assessment that "the structural political risks facing the Dollar would remain," highlights how little a change in congressional control would do to resolve the longer-term vulnerabilities in the US political landscape.