Most analysts and market participants agree that the Federal Reserve will hike its Fed Funds Rate at the last policy meeting of the year, while continuing to slowly unwind its balance sheet. Most likely the Fed will raise its benchmark rate to the range of 1.25 to 1.5 percent.

Andri Hardianto, Senior Research and Analyst Asia Trade Point Futures (ATPF), says the strengthening US dollar - triggered by growing certainty about US President Donald Trump's ambitious tax reform program (Republicans are currently preparing a USD $1.5 trillion tax cut) - puts pressure on most other currencies around the world.

The reason why the Indonesian rupiah remained stable over the past week, contrary to various other emerging market currencies, is because Indonesia's domestic fundamentals are strong. For example, inflation continued to ease in November 2017 (to 3.30 percent year-on-year, a low inflation rate for Indonesian standards).

Meanwhile, the central bank of Indonesia (Bank Indonesia) acknowledged last week that it had used part of the nation's foreign exchange reserves to defend the rupiah in October and November. Therefore, the foreign exchange reserves fell from USD $126.55 billion at the end of October to USD $125.97 billion at the end of November. It is assumed Bank Indonesia would like to keep the rupiah rate around IDR 13,500 per US dollar. However, the central bank is not expected to burn foreign exchange in vain and therefore it should allow some rupiah weakening if the Fed hikes its key rate (or Bank Indonesia may decide to raise its benchmark rate accordingly at the December policy meeting, hence giving some support to the rupiah).

Ahmad Mikail, Economist at Samuel Sekuritas Indonesia, says the rupiah may have weakened to the range of IDR 13,570 - 13,600 per US dollar by the end of the week.

Meanwhile, on Monday (11/12), the central banks of Indonesia, Malaysia and Thailand announced to launch a new regulatory framework aimed at boosting the use of local currencies in the region's transactions to reduce dependence on the US dollar. The framework should also facilitate and boost trade and investment in the three countries. Bank Indonesia Governor Agus Martowardojo stated that 94 percent of Indonesia's total exports and 78 percent of imports are settled in US dollars.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia