Ahead of FOMC Indonesia's Rupiah Rate Weakens, Stock Index Jumps
Ahead of the Federal Open Market Committee (FOMC) meeting on 17-18 December 2013, the Indonesia rupiah exchange rate is continuing its depreciating trend as the economies of the USA and Japan, particularly the capital markets, are improving and causes the US dollar and Yen to appreciate against other currencies. Both currencies are considered safe havens amid the current volatile world economy. One of the victims is the rupiah, which fell to IDR 12,126 per US dollar at 12.30 local Jakarta time (Bloomberg Dollar Index).
The central bank of Indonesia (Bank Indonesia) is still firm in its stance that the current depreciating trend of the rupiah exchange rate is in line with the currency's fundamentals. Moreover, it is not just the rupiah which is depreciating but most emerging market currencies are weakening against the US dollar. Agus Martowardojo, Governor of Bank Indonesia, said that the central bank continues to monitor the situation. It engages in limited interventions to support the rupiah, while keeping its foreign exchange reserves at a safe level (USD $97 billion at end November).
Martowardojo continued to say that the advantage of a weak rupiah is that the country's current account deficit will narrow as a weak currency boosts exports but limits imports. The current account deficit eased from 4.4 percent of GDP in the second quarter of 2013 to 3.8 percent of GDP in the third quarter.
However, there are reports that the central bank's Jakarta Interbank Spot Dollar Rate (JISDOR), which is set at IDR 12,104 per US dollar on Tuesday 17 December 2013, is losing its status as the main benchmark for local Indonesian banks. The difference between Bank Indonesia's mid rate and several Indonesian banks' exchange rates is widening.
| Source: Bank IndonesiaIndonesia Stock Exchange
The benchmark stock index of Indonesia (IHSG) was up 1.21 percent during the first trading session on 17 December 2013. Investors are probably optimistic that the Fed will not change its bond-buying program yet. One reason why the Federal Reserve may not wind down its quantitative easing program in 2013 is because of the replacement of Ben Bernanke by Janet Yellen on 31 January 2014. Some analysts believe it is not likely that Bernanke will introduce such a drastic policy change only 1.5 months before his departure as Head of the Federal Reserve.
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