Rupiah Slumps as Dollar Strength and Inflation Fears Mount

The Indonesian rupiah continued its downward trend, poised for a second consecutive weekly decline. The currency weakened to IDR 17,950 per U.S. dollar on Friday, as the dollar index hovered near a two-month peak. This recent weakness is attributed to expectations of further policy tightening by the Federal Reserve in response to mounting inflation concerns and robust U.S. economic data.

The rupiah's decline was also influenced by domestic factors, including rising food costs linked to El Niño, which led to an acceleration in annual inflation to 3.19% in August. Indonesia's reliance on oil imports adds to its fiscal concerns, as officials warned that elevated energy prices heighten inflation risks.

Additionally, persistent foreign exchange demand from importers and capital outflows exerted further pressure on the rupiah. Bank Indonesia maintained its benchmark rate at 5.75% for a third month earlier this week, following cumulative 100bp of hikes since May, while continuing to intervene in the foreign exchange market and implement other stabilization measures.