Rupiah declines against dollar on S&P’s downgrade of European credit

The rupiah weakened Tuesday morning against the US dollar from Rp 9,120 to Rp 9,200 per dollar after rating agency Standard & Poor’s cut its credit rating of the European Financial Stability Facility (EFSF).

“The downgrade from AAA rating to AA+ rating has given a negative sentiment to the financial market all around the world, including in the domestic market,” Samuel Sekuritas financial market analyst Lana Soelistianingsih said in Jakarta as quoted by Antara.

The EFSF serves as a rescue package fund for Greece, Portugal and Ireland, with France and Austria as the guaranteeing sponsors, according to Lana.

S&P said the loss of France's AAA rating had forced it to cut of the EFSF’s credit rating to AA+ from AAA, which could increase its borrowing costs, The Guardian reported on Monday.

Germany and Finland, the remaining AAA-rated countries in the single currency, are expected to come under pressure to increase their commitments to bolster the EFSF's funds in order to prevent a further credit downgrade and higher interest costs, the UK newspaper reported.

Lana said investors were waiting for an EU consolidated fiscal policy, which was expected to bring down its deficit from 4.1 percent of 2011’s GDP to 3 percent of 2012’s GDP.

“The European Central Bank [ECB] will probably lower its interest rate, which now stands at 1 percent, in the next ECB meeting. The EU is facing a serious crisis,” she said.

Milenium Dantama Sekuritas market analyst Abidin said the rupiah would continue to feel pressure from the euro zone crisis in the future, but would not fall dramatically because Bank Indonesia would keep it in check. (mtq)