| Source: Bank Indonesia

Last month, the US Federal Reserve announced that it would cut its monthly USD $85 billion bond-buying program to USD $75 billion per month starting from January 2014. However, the market has been speculating that - amid an improving US economy - the Fed will reduce quantitative easing not by the announced USD $10 billion, but at least USD $20 billion. Thus, less US dollar liquidity implies a stronger US dollar at the expense of most Asian currencies, including the Indonesian rupiah. The US dollar was also supported by Morgan Stanley's negative assessment of gold, one of the other safe havens.

The rupiah also weakened after the pound sterling fell due to the decision of the Bank of England (BoE) not to raise interest rates yet. Low UK interest rates will thus remain in place for a while.

Japan's depreciating yen also had a negative impact on the rupiah (although earlier in the week the yen had strengthened as a number of Asian stock markets weakened) after the central bank of Japan (Bank of Japan, BoJ) decided in its latest meeting (last Wednesday) to maintain its quantitative easing program.

Other weakening currencies in the Asia Pacific region were also a contributing factor. The Australian dollar depreciated after Australia's consumer price index (CPI) increased faster than expected. In the fourth quarter of 2013, CPI rose 0.8 percent instead of a forecasted 0.5 percent. Meanwhile, the Thai baht weakened after responding to disturbances in business activity brought on by political unrest and China's yuan weakened due to weak manufacturing data.

However, the fall of the rupiah was limited as - at the beginning of the week - the Lloyds Banking Group Plc released a report which predicts that Indonesia's currency will strengthen in 2014. Moreover, it was reported by the Indonesia Investment Coordinating Board (BKPM) that direct investments in Indonesia (both foreign and domestic) reached a record high in 2013 at IDR 398.6 trillion (USD $33 billion). This also had a positive impact on the rupiah. Lastly, news that China's central bank (the People's Bank of China, PBC or PBOC) will increase liquidity in China's financial system also supported the rupiah's value.

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