Indonesia's Rupiah Set for Largest Weekly Decline Since May Amid Higher US Yields

The Indonesian rupiah is on track to suffer its largest weekly decline since May, weighed down by rising US Treasury yields and a stronger dollar. This comes as investors await the Federal Reserve's decision on interest rates, with expectations that it will maintain higher rates for longer.

Bank Indonesia maintained its benchmark interest rate at 5.75% this week, after raising it by 100 basis points in May and June to support the weakening rupiah. The central bank signalled a preference for market-based measures over further monetary tightening, citing elevated global yields and higher US yields as pressures on the currency.

Lloyd Chan, FX strategist at MUFG, noted that the finance ministry and Bank Indonesia are coordinating next year's financing plans to ease pressure on the domestic bond market. However, this coordination may offer limited protection against a prolonged external shock, potentially leaving more of the adjustment burden on the rupiah and increasing pressure on the central bank to keep monetary policy tight.