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Rupiah hits 12,000 per US dollar
Selling pressures hit the rupiah as demand for US dollars rose amid concerns that tension in Iraq could further roil Indonesiaâs trade balance as an importer of oil
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Selling pressures hit the rupiah as demand for US dollars rose amid concerns that tension in Iraq could further roil Indonesia's trade balance as an importer of oil.
The rupiah touched 12,027 per US dollar on Wednesday, its lowest level in four months, before edging upward to close at 11,997 against the greenback, according to prices from local banks compiled by Bloomberg. Meanwhile, Bank Indonesia's (BI) middle rate showed the nation's currency at 11,978 per dollar.
BI Governor Agus Martowardojo attributed the weakening rupiah to the ongoing political crisis in Iraq.
'The situation in Iraq has created fears over the possibility of increasing oil prices. That will have a global impact, especially for net oil importers,' he said on Wednesday, adding that the situation could prompt hoarding by buyers.
'There are also concerns that the political tension in Iraq and rising oil price will aggravate Indonesia's trade balance and current-account deficit,' Agus added.
Sunni militants have taken control of most of Iraq's largest oil refinery, following disputes between the country's Sunni and Shia communities. The tensions have led to increases in the price of both West Texas Intermediate (WTI) and Brent crude oil.
The WTI crude rose 0.3 percent to US$106.66 per barrel, while Brent crude increased by 0.1 percent to $113.61 per barrel on Wednesday from the day before.
The rupiah has lost 2.7 percent of its value this month, and is the worst performing currency in Asia, as an official report showed the nation's trade deficit reached a nine-month high of $1.96 billion in April.
Bank Central Asia (BCA) economist David Sumual said the higher demand for US dollars in the domestic market had put additional pressure on the rupiah. Approaching the Idul Fitri holiday, Indonesia would see higher imports of raw materials, including food, he added.
'People will go traveling during the holiday, which will require high oil imports. At the same time, we usually record capital outflows because of dividend repatriation by foreign companies,' he said.
Fauzi Ichsan, an economist at Standard Chartered Bank Indonesia, said that unless Indonesia booked a trade surplus in the coming months, the country would continue to see a higher trade deficit, which would eventually squeeze the currency.
'BI has taken measures to ease the pressure with its tight monetary policies. We'll see what happens in the second half [of the year]. If we manage to reduce the deficit, the rupiah stands a chance to rebound to around 11,500,' he said.
Should the opposite happen, he added, the rupiah may once again exceed 12,000 per dollar, which would force the central bank to jack up its benchmark interest rate.
BI embarked last year on the country's most aggressive monetary-tightening cycle in eight years, adding 175 basis points to its key interest rate of 7.5 percent ' which has been retained since then ' to combat soaring inflation, the current-account deficit and the depreciating rupiah.
Finance Minister Chatib Basri expressed his optimism about the rupiah's future prospects, saying the current situation was only temporary. 'The effects of geopolitical situations always subside, then things will return to normal,' he said.
Chatib said he expected the rupiah to average at 11,600 per dollar this year, as stated in the revised 2014 state budget, which was approved by the House of Representatives on Wednesday evening.
The Iraq tensions have been exacerbated by the possibility that growth in the United States, the world's largest economy, had picked up and that labor market indicators showed further improvements, hence encouraging investors to reinvest their funds there.
'The [US Federal Reserve's Open Market Committee] is holding a two-day meeting that will end [Wednesday]. We think the Fed may end its quantitative easing program sooner than expected and raise interest rates in the US because the data presented during the meeting seemed positive,' BI's governor said.
