In line with expectations the US Federal Reserve left its benchmark interest rate unchanged in the range of 1.50 - 1.75 percent at the two-day May policy meeting (1-2 May 2018). The US central bank also said it expects the recent rise in inflation (approaching the Fed's target) to be sustained, thus markets are increasingly expecting an interest rate hike at the next policy meeting (scheduled for 12-13 June).
In fact the Federal Reserve seemingly hinted that US inflation may be allowed to pass (slightly) above the 2 percent (y/y) target, implying that further rising US inflation may not become a cause for more aggressive monetary tightening. Theoretically, this should somewhat curtail capital outflows from emerging markets.
However, there are other factors at play today that put pressure on Asian stock markets and currencies. Overnight, stocks on Wall Street were plagued by rising concerns over worsening trade relations between the USA and China after the Donald Trump administration threatened to impose restrictions on Chinese telecoms companies' ability to sell telecoms equipment on the US market. Trade talks between US Treasury Secretary Steven Mnuchin and Chinese Vice-Premier Liu He are set to start later today (03/05). However, few market participants and analysts expect to see positive results coming from this meeting.
The US dollar somewhat retreated from its four-month high against a basket of major currencies on Thursday because the Federal Reserve was not as hawkish as expected. Still, there are enough factors (such as the Fed's looming June rate hike, improving US economic conditions, and rising US 10-year treasury yields) as well as uncertainty (primarily trade talks between US-China) to support the US dollar. Thus, the Indonesian rupiah is weakening and is gradually approaching the psychological IDR 14,000 per US dollar level. By 13:00 pm local Jakarta time the rupiah had weakened 0.19 percent to IDR 13,975 per US dollar (Bloomberg Dollar Index).
Meanwhile, Indonesia's benchmark Jakarta Composite Index is leading losses among Asian stock markets on Thursday. Indonesian stocks fell 2.33 percent to 5,872.37 points in the first trading session.