Based on the Bloomberg Dollar Index, the Indonesian rupiah had appreciated 0.65 percent to IDR 13,221 per US dollar by 10:30 am local Jakarta time on Friday morning (08/09), extending Thursday's gains when the rupiah strengthened 0.20 percent against the greenback. What explains this strong rupiah performance?
Main reason for this strong rupiah performance is US dollar weakness. Thus, not only the rupiah but most major currencies are rising sharply today on broad US dollar slump.
US dollar weakness occurred after the latest monetary policy decisions taken by the European Central Bank (ECB) on Thursday (07/09). The ECB decided to keep the Euro zone interest rates at an historic low of 0.00 percent and expects to keep it at this level for an extended period. Nevertheless, ECB President Mario Draghi informed that the ECB would assess the Euro zone stimulus mechanisms in October and thus - for the first time - seemed to hint at a reduction of the bank's bond purchases in 2018. Therefore, the October 2017 ECB meeting will be closely watched by investors and analysts.
Currently the ECB still purchases 60 billion euros (approx. USD $71.5 billion) worth of bonds per month in an effort to encourage economic growth in the 19-nation Euro zone, while pushing the block's inflation towards its target of just below 2.0 percent (y/y). Inflation, however, has remained sluggish.
In combination with the stronger euro exchange rate it would actually justify extending the ECB's quantitative easing (QE) bond-buying program. But, the problem is that the program is approaching the legal limits and may therefore need to be wound down (while there have also occurred negative side-effects of the QE scheme such as fears of bubbling real estate prices in Germany).
In reaction to the ECB meeting, the euro spiked to USD $1.204 per US dollar from USD $1.1970 before the start of Draghi's press conference on Thursday. So far in 2017 the US dollar has weakened more than 13 percent against the euro. Analysts say a stronger euro could stifle the region's strengthening economic growth as a strong currency is negative for the Euro zone's exports. Considering many countries, like China, have linked their currencies to the US dollar, it would affect a significant portion of EU trade.
Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.35 percent to IDR 13,284 per US dollar on Friday (08/09).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Update: at the end of trading on Friday (08/09) the Indonesian rupiah had appreciated 0.92 percent to IDR 13,185 per US dollar (Bloomberg Dollar Index)