Over the last year, the Indonesian rupiah has been rising when compared to a wide variety of world currencies. Some of the more pronounced strength has been seen against the US dollar, which has been travelling in the opposite direction for most of the same period. To many investors that are focused on the currency markets, it might appear as though these two currencies are largely unrelated. But when we look at the trends that have been developing over the last year, it quickly becomes clear that this is just not the case.
In fact, the relationship between the dollar and the rupiah is much more pronounced than many investors might regularly assume.
Given this relationship, it will be important for any investor that is holding assets denominated in the rupiah to have a relatively firm understanding of where the dollar is headed next. This can be a tricky concept given that the greenback is still the world’s reserve currency and that there are many different factors that combine to dictate the general direction for the currency.
USD/IDR Currency Pair:
In the chart above, we can see the USD/IDR currency pair. If you are unfamiliar with how forex exchange rates work, this chart essentially prices the Indonesian rupiah in terms of the US dollar. So, if the chart value is falling, it means that the rupiah is getting stronger while the dollar is getting weaker. If the chart value is rising, it means that the dollar is getting stronger while the rupiah is getting weaker. This chart plots the relatively price of both currencies over the last year. So, here, we can see that the dominant trend is very clear in terms of how the dollar has been progressing against the rupiah.
Of course, this news is not all positive. Rising currency values are generally unfavourable for export markets, and these latest trends will not likely benefit Indonesian companies that sell their goods to foreign consumers. But when we think of where these trends are likely to be headed in the future, it is important to remain focused on the actions of the US central bank, the Federal Reserve. Most of the trend activity in the last year has been based on the fact that the Federal Reserve is likely to start raising interest rates before the end of this year. Rising interest rates are positive for currency values. So, if these expectations turn out to be the case, we can expect some significant changes in terms of the how the rupiah is likely to perform. Rising interest rates in the US would likely mean rising currency values in the USD/IDR. If this occurs, we can start to expect falling currency values to once again benefit export companies that are based in Indonesia.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia