USD/IDR forecast: Indonesian rupiah on back foot as BI struggles to keep pace with aggressive Fed

The Indonesian rupiah (IDR) has fallen to its lowest level against the US dollar (USD) since April 2020 amid persistent dollar strength, with Indonesia’s trade surpluses preventing a larger fall. 

What has been driving the USD/IDR exchange rate, and will the pair continue to strengthen above the 15,000 level or retreat? 

In this article, we look at the latest US dollar to Indonesian rupiah forecast round-up.

What drives the USD/IDR rate?

On the foreign exchange (forex; FX) market, currencies are traded in pairs of quote currencies and base currencies. The USD/IDR pair refers to the number of Indonesian rupiah – the quote currency – needed to buy one US dollar – the base currency.

The US dollar is the global reserve currency. It is viewed as a safe haven asset by investors, offering protection during times of economic contraction or uncertainty. 

The value of the US dollar is affected by the performance of the US economy in terms of gross domestic product (GDP), industrial activity, services, employment and trade balances, as well as fiscal and monetary policy such as government spending and interest rates. It is also affected by sentiment towards the global economy. 

The greenback, as it is also known, has soared in value in 2022 in response to rapidly rising interest rates as the US Federal Reserve (Fed) attempts to curb high inflation, as well as concerns about a slowdown in the global economy.

The Indonesian rupiah is the official currency of Indonesia and is issued by the Bank Sentral Republik Indonesia (the Central Bank of the Republic of Indonesia). The rupiah has been the country’s official currency since 1949, replacing the Indonesian Dutch East Indies guilder. Following a sharp depreciation in the currency in the 1950s, a new version of the rupiah was issued in 1965 at a rate of 1,000 old rupiah to 1 new rupiah.

In recent years, the central bank has been calling on the Indonesian government to redenominate the rupiah, but lawmakers have yet to deliberate on the bill.

The value of the rupiah is driven by the country’s economic growth, particularly its exports of commodities and policies that often regulate exports, as well as monetary policy on interest rates and inflation. Indonesia exports commodities such as palm oil, coal, copper and nickel. Indonesia accounts for around one third of the world’s edible oil supply, as it is the world’s largest exporter of palm oil, ahead of neighbouring Malaysia. 

USD/IDR pair breaches 15,000 mark

The USD/IDR pair was relatively stable for the first four months of 2022, trading around the 14,300 level. But the pair began to climb heading into May reaching 14,700 on 19 May. The rate slipped to 14,438 on 3 June before resuming its rally to reach 14,997 on 6 July. 

USD/IDR briefly traded above 15,00 on 21 July, but quickly retreated, dropping to 14,668 on 12 August, when the dollar shed value. A week later the pair was back up at 14,888. In September, the pair breached the 15,000 mark to trade at a high of 15,133 on 26 September.

The sharp rise in May-July was driven by the combination of Covid-19 lockdowns in China, a hawkish US Federal Reserve rapidly raising US interest rates, uncertainty surrounding Indonesia’s export policies and growing concerns among traders about global growth risks, which are weighing on commodity markets.

In August and September, the US dollar has accelerated its rise, with the Dollar Index (DXY) – which measures the dollar against a basket of currencies – climbing to fresh 20-year highs. That acceleration was in response to comments by Fed chairman Jerome Powell at Jackson Hole in late August indicating that US interest rates could be higher for longer than traders had expected. 

At the time of writing on 26 September, the DXY had traded at an intraday high of 114.53, its highest level since January 2002.

On 22 September, the Bank of Indonesia raised interest rates by 50 basis points, a bigger hike than the 25 basis points analysts had expected. 

Indonesian exports climbed in August for a 28th consecutive month. Exports surged by 30.2% year on year to a record high, compared with expectations of a 19.9% increase. The country recorded a $5.76bn trade surplus, a four-month high and the second highest on record. That performance led analysts to expect a 25-basis point hike, rather than the 50 basis points the bank delivered.

The bank said in a statement:

“Rupiah stability has been maintained despite increasing global financial market uncertainty.  As of 21st September 2022, the rupiah depreciated 1.03% (ptp) on the level recorded at the end of August 2022.  Rupiah performance has been maintained with the support of domestic foreign exchange supply, positive perception concerning Indonesia's economic outlook as well as BI stabilisation measures,” the bank added, noting that as of 21 September, the rupiah was down by 4.97% year to date, compared with a 7.05% decline for the Indian rupee, an 8.51% fall in the Malaysian ringgit and a 10.07% drop in the Thai baht. 

“Moving forward, Bank Indonesia will continue to strengthen [its] rupiah stabilisation policy in line with the currency's fundamental value, thereby reinforcing macroeconomic stability and efforts to manage inflation.”

What is the outlook for the USD/IDR exchange rate? Will the pair hold above 15,000, or is there scope for it to retreat? Let’s look at some long-term views for the USD/IDR forecast.

USD/IDR forecast: Will dollar strength push the pair higher?

Analysts at Malaysian bank Maybank noted in their monthly USD/IDR forecast that “the magnitude of USDIDR upswing has been somewhat contained versus historical episodes of IDR depreciation. Resilient domestic growth momentum and trade surpluses, start of BI rate hike cycle etc., could continue to help cap USDIDR upside risks in the interim. But broader recovery in IDR will be likely slow, given Fed commitment to a more restrictive monetary policy stance for longer, global growth jitters playing out… Pair could test >15,000 intermittently, even as sustained breakout higher for longer looks less likely at this point.”

The Maybank analysts noted in their weekly outlook on 23 September that there was technical support for the USD/IDR pair at 14,8000, with resistance at 15,200.

Analysts at Singapore-based United Overseas Bank (UOB) expect the pair to move towards resistance, stating in their USD/IDR prediction:

“Heightened demand for Indonesia’s commodity exports has supported the economy’s recovery in many ways this year. Surging exports have in turn helped drive manufacturing activity, with PMI manufacturing indices staying in expansion for all of 2022.  Meanwhile, 28 straight months of trade surpluses have shored up the IDR and the currency has been relatively stable compared to regional peers. The currency has also faced less depreciation than in previous episodes of intense financial market volatility, such as 2018 or early 2020,” analysts at Dutch bank ING noted. 

ING’s USD/IDR forecast for 2022 shows the pair retreating to 14,850 by the end of the year, from 14,950 at the end of September. The pair could then trade down to 14,700 by the end of the first quarter of 2023 and 14,500 by the end of next year. The pair could stabilise and end 2024 at 14,500, according to the forecast.

However, the USD/IDR forecast from French bank Societe Generale indicates that the pair could continue to trade above 15,000 for the long term, averaging 15,050 in 2023 and 15,201 in 2024. The bank’s USD/IDR forecast for 2025 shows the pair rising to an average of 15,506.

Analysis by US-based asset manager State Street Global Advisors supports the view that the US dollar could remain relatively strong, noting: “Disappointing growth in China, a weak Chinese policy response to reverse the slowdown, and slower goods demand from Western economies are likely to weigh heavily on Asian growth prospects over the next 3-6 months. Meanwhile, we are seeing surprising resilience in US activity and even an improvement in survey-based PMI data. We now must consider that a heightened risk of a reacceleration in US growth will likely have to be met with an even tighter monetary policy. 

“Thus, both rates and relative growth may be in favour of the US and the USD. At best this extends the period of USD strength for several months, but it could also lead to a higher peak for the USD for this cycle.”

Analysts have yet to issue an USD/IDR forecast for 2030.

USD/IDR analyst predictions 

If you are looking for a USD/IDR forecast, it’s important to remember that currency markets are highly volatile, making it difficult for analysts to make accurate long-term predictions. 

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

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