Since the start of 2015, the rupiah has depreciated nearly 9 percent against the US dollar. If we go back further in time, when - in late May 2013 - former Federal Reserve Chairman Ben Bernanke informed markets that the central bank of the USA was thinking about winding down its massive quantitative easing program, we see a staggering 38 percent decline against the US dollar (between June 2013 and August 2015).

Although the US dollar is basically strengthening against all major currencies around the globe (due to US monetary tightening), there are several internal factors that cause a steeper decline of the rupiah (only Malaysia’s ringgit has seen a bigger fall against the US dollar year-to-date). The rupiah is currently not an attractive asset as Indonesia is being plagued by a wide current account deficit, high inflation, and slowing economic growth. Furthermore, with foreign investors holding nearly 40 percent of Indonesian government bonds (worth approx. IDR 538 trillion, or, USD $40 billion) the country is highly vulnerable to the ‘mood swings’ of foreign investors and thus capital outflows quickly emerge in times of global uncertainty, particularly if the economic and financial fundamentals of Indonesia are questioned.

Indonesia and Malaysia are both plagued by falling commodity prices (particularly crude oil, crude palm oil and coal), a trend caused by the sluggish global economy and particularly by China’s economic slowdown. Some analysts, in fact, see the fall in commodity prices as having a more severe negative impact on the performance of emerging markets currencies than expectation about a Federal Reserve interest rate hike.

It remains unclear how the rupiah will react once the Federal Reserve decides to raise its interest rate environment (which could happen next month as US macroeconomic data are solid). It could be that Indonesia’s currency has already (mostly) priced in the effects of a US interest rate hike and hence we might not see a sharp decline after the Fed decides to raise its rates. When we take a look at the rupiah’s response toward the US quantitative easing (QE) program, we saw this phenomenon. There was sharp rupiah depreciation in the months before the Federal Reserve announced to wind down its QE program. However, shortly after the first cut took place in December 2013 the rupiah experienced a remarkable recovery in the first quarter of 2014 (although it needs to be stressed that this recovery was also supported by Joko Widodo’s decision to join the presidential race in 2014).

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.04 percent to IDR 13,541 per US dollar on Tuesday (11/08).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Over the past couple of days the fall of the rupiah has been very gradual, possibly because of intervention by Indonesia’s central bank (Bank Indonesia). Indonesia’s foreign exchange reserves fell by USD $40 million to USD $107.6 billion at the end of July 2015 as Bank Indonesia used part of the reserves to support the rupiah.