The Indonesian rupiah is collapsing, a trend that may continue in the coming weeks if the central bank fails to intervene. The USD/IDR exchange rate soared to a high of 16,653 on Tuesday, the highest level since 1998 when the Asian currency crisis happened.
Why the Indonesian rupiah has crashed
It then stabilized after the Bank of Indonesia confirmed that it had intervened in the forex and bond market to stabilize it. Central banks intervene by buying the local currency in the open market using its foreign holdings. These purchases lead to more demand for the local currency and lift it up.
Indonesia’s central bank becomes the second emerging market central bank to intervene this month. Last week, the Turkish central bank spent over $12 billion after the government arrested the main opposition leader.
The Indonesian rupiah has crashed because of the sluggish economic growth. Data released earlier this month showed that the economy expanded by 5% in 2024, missing analysts’ estimates.
The weak economic growth means that the central bank will likely continue cutting interest rates. It has already slashed rates two times, moving them from a high of 6.25% last year to 5.75% today.
With inflation tumbling, analysts anticipate more rate cuts to stimulate spending. A recent report showed that the headline inflation moved to minus 0.09% in February, making it the first time in decades that it has moved into a deflation. It peaked at almost 4.70% after the pandemic.
As such, with the economy slowing, and inflation in the negative zone, it is highly unlikely that the bank would hike interest rates to make the rupiah rates more attractive.
The USD/IDR exchange rate has also jumped because of the ongoing government policies. For example, the strategy to provide free lunches in school and to pregnant mothers costs about $28 billion, leading to a budget deficit in January and February.
At the same there are concerns that the Indonesian economy may become a victim of Donald Trump’s policies. The two countries do about $38 billion in trade annually, with the US having a trade deficit of over $27.9 billion. This, together with its decision to ban iPhone 16 sales, means that the country may become a focus of Donald Trump.
Indonesia’s economy is also seeing more competition from Chinese companies that are exporting low inflation globally.
USD/IDR technical analysis
The USD to IDR exchange rate has been in a strong uptrend in the past few months, and this week, it moved to a multi-decade high. It has jumped above the crucial resistance level at 16,471.75, its highest swing in June last year.
The pair has formed an ascending channel and has retested its upper side. It has remained above the 50-week and 25-week moving averages. The MACD and the Relative Strength Index (RSI) have continued rising.
Therefore, the USD/IDR pair will likely continue rising for a while. That surge may see it hit the key resistance point at 17,000.A drop below the support at 16,470 will invalidate the bullish outlook.
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