Last week, US dollar strength was already felt, pushing the rupiah into red territory - with the exception of Friday (29/09) when Bank Indonesia Governor Agus Martowardojo stated that Indonesia's central bank would not be keen on cutting its benchmark interest rate further.

Recent US dollar strength is brought about by higher US yields and rising expectations of a Fed Funds Rate hike in December 2017 (and perhaps three more US rate hikes in 2018). Such expectations are partly based on reports that US President Donald Trump approached former Federal Reserve Governor Kevin Warsh for a potential nomination to head the US central bank. Warsh is seen as more hawkish than incumbent Fed Chair Janet Yellen.

Earlier today it was reported that Indonesia's inflation rate eased to 3.72 percent (y/y) in September 2017. However, this did not lead to a positive impact on the rupiah exchange rate because Bank Indonesia sees little room for monetary easing in the remainder of 2017 (after two surprise rate cuts in August and September).

Meanwhile, Indonesia's benchmark Jakarta Composite Index touched another all-time record high on Monday (02/10) amid, generally, rising Asian stock markets supported by China's September manufacturing activity that grew at its fastest pace since 2012, while a Bank of Japan survey showed that Japan's big manufacturers now have more confidence in the country's business conditions than they have had for a decade as a weak yen and strong global demand add momentum to the economic recovery.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) only depreciated 0.05 percent to IDR 13,499 per US dollar on Monday (02/10). Considering today's developments, it should weaken more significantly tomorrow.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia