Despite the tendency of the US dollar to strengthen after the US Federal Reserve (finally) decided to raise interest rates at its latest policy meeting, the Indonesian rupiah is showing a remarkable performance today. This performance is attributed to less uncertainty after the US rate hike announcement but also to Bank Indonesia's statement that it sees a stable rupiah and less market volatility after the Fed Fund Rate. Moreover, future US rate hikes will be gradual and gentle, Fed Chairwoman Janet Yellen said.

Last week, Bank Indonesia also held its monthly policy meeting and decided to maintain its key interest rate (BI rate) at the relatively high level of 7.50 percent as it wants to monitor global reactions toward the US rate hike first (before deciding whether the timing is right to cut the BI rate). Bank Indonesia statement that it considers to cut its interest rate environment is a signal that domestic macroeconomic conditions are solid (with inflation under control and a lower current account deficit).

However, although Indonesia's central bank said that it sees a stable rupiah rate in 2016, the latest Bloomberg survey shows that analysts believe that the rupiah will become the worst-performing Asian currency in 2016 (replacing Malaysia's ringgit) due to capital outflows and Indonesia's falling foreign exchange reserves. At end-November these reserves stood at USD $100.2 billion (Indonesia's foreign exchange reserves have declined 10 percent this year and are at the lowest level since December 2013, implying that the central bank has limited resources to defend the rupiah). Indonesia is regarded particularly vulnerable to the Fed Fund Rate hike as overseas investors hold 38 percent of the local currency sovereign bonds. Moreover, Indonesia's economy is negatively affected by China's economic slowdown as China is the key trading partner of Indonesia.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 1.14 percent to IDR 13,872 per US dollar on Monday (21/12).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia