The Jakarta Post
The rupiah has hit the psychological threshold of 12,000 per US dollar again on concerns that an interest rate hike in the US may bring investment appetite back into the world's top economy and see emerging economies suffer from capital outflows.
On Thursday, the Indonesian currency fell by 122 basis points, or almost 1 percent, to 12,030 per dollar, the weakest level since February, according to the Jakarta Interbank Spot Dollar Rate ( JISDOR ).
BI Senior Deputy Governor Mirza Adityaswara attributed the currency's weakness to renewed risks in emerging markets, after the US Federal Reserve signaled it would raise its rates higher than market expectations, a situation that could reverse capital flows to the US.
The US central bank's two-day policy meeting that ended Wednesday ( Thursday in Jakarta ) concluded with more Fed executives suggesting a faster pace for rate hikes, according to their policy statement.
Mirza said that BI would be ready to intervene in the market and supply dollars when necessary to stabilize the rupiah, but argued that a 12,000 level for the currency was 'undervalued' and deviated too much from its fundamentals.
'BI views that a rupiah level of 11,600 to 11,900 [per US dollar] is a fair level based on the current economic condition in Indonesia,' he said. 'The rupiah will strengthen when the government introduces further policy measures to reduce fiscal and current-account deficits.'
The rupiah, South Africa's rand, Brazil's real, India's rupee and Turkey's lira were dubbed the 'Fragile Five' currencies most vulnerable to capital outflows by US-based Morgan Stanley.
Other emerging market currencies also depreciated in line with the steep appreciation of the dollar, with the dollar index strengthening to a level unseen in more than four years.
On Thursday, all the 'Fragile Five' currencies weakened against the dollar, with the rand and real falling the steepest among 24 developing nation currencies tracked by Bloomberg, both depreciating by more than 1 percent.
Finance Minister Chatib Basri explained that the rupiah was vulnerable to external risks because the economy relied greatly on foreign fund inflows, after both the country's stocks and bonds markets had seen strong rallies this year.
'We also must be careful when formulating our rupiah assumption next year,' the minister said in a phone interview from Hong Kong.
Foreign investors posted a net sell of Rp 678.4 billion ( US$56.4 million ) on Thursday, though the Jakarta Composite Index ( JCI ) still advanced 0.4 percent to close at a one-week high of 5,208.1, as domestic investors boosted their equity holdings.
Meanwhile, the bonds market saw a correction as the yield for the benchmark 10-year rupiah bonds rose two basis points to 8.30 percent, according to prices from the Inter Dealer Market Association. Bond yields move in the opposite direction to prices.
'The rupiah looks at risk of pushing to fresh highs for 2014,' Jonathan Cavenagh, a currency strategist with Australia-based investment bank Westpac, wrote in an email interview on Thursday.
'We suspect there will be renewed interest from foreign investors to hedge their onshore bond holdings.'
BI's foreign exchange ( forex ) reserves, used to intervene in the market to stabilize the rupiah, stood at a one-year high of $111.2 by the end of June, but analysts have advised the central bank to utilize its dollar disposal carefully.
'BI's intervention must be carried out with the right timing, because any hasty move into the market could end up being useless,' an executive of a foreign bank in Jakarta, who wished to remain anonymous, said Thursday.