The Jakarta Post
The rupiah strengthened for the second consecutive days as investors' worry on tighter global liquidity has proven to be disproportionate, after the US central bank delivered a strong signal that they would not hike the interest rate very soon.
The rupiah advanced 1.2 percent on Thursday to trade at 12,565 per US dollar, overturning its losing streak, after the currency hit a 16-year low of 12,900 per dollar earlier this week, according to the Jakarta Interbank Spot Dollar Rate ( JISDOR ).
On Thursday, the rupiah led gains in Asian currencies, many of which rose after the Federal Reserve concluded its two-day policy meeting by stating that the US central bank would remain 'patient' before increasing its interest rates. The Indian rupee and Malaysian ringgit strengthened by at least 0.6 percent.
'The tone of the Fed's statement appears to be neutral, meaning a quickening in interest rate hikes is unlikely,' Finance Minister Bambang Brodjonegoro said Thursday.
'The markets now have returned to the normal position after suffering a 'temporary hysteria' in response to the economic crisis in Russia,' the minister added.
Analysts have said that the recent correction of the rupiah, which dropped 3.7 percent in the first two days this week to hit 12,900 per dollar, was an overreaction to the potential of investment risks in Indonesia, a member of the so-called 'Fragile Five' economies most vulnerable to outflows due to their high current-account deficit.
Latest estimates show that Indonesia's current-account position has improved. The current-account deficit in the fourth quarter would be at 2.8 percent of gross domestic product ( GDP ), compared to a 3.1 percent shortfall in the previous quarter, according to estimates from Bank Indonesia ( BI ).
On Thursday, Indonesia's five-year credit default swaps ( CDS ), the cost to insure against government bonds, declined to 158.4 basis points, compared with 182.6 a day earlier. Higher CDS indicates higher risk for investors.
The Jakarta Composite Index ( JCI ), the main barometer in local stock exchange, rallied 1.5 percent to close at 5,113. The JCI, which has advanced 19.6 percent year-to-date, is among the region's best performers, exceeding the 19.3 percent surge in the Philippines and 16.8 percent rise in Thailand.
'The market was relieved because the Fed is committed to remain prudent when hiking its interest rates,' BI Senior Deputy Governor Mirza Adityaswara wrote in a text message on Thursday.
'The weakness in the rupiah has proven to be temporary,' added Mirza, who had described the rupiah rate of 11,900 to 12,200 per dollar as the central bank's 'ideal' currency value.
BI is seen as keeping the currency undervalued, or weaker than its actual value, to boost exports and rein imports in a bid to improve Indonesia's external position.
The rupiah's real effective exchange rate ( REER ) ' a competitiveness level of the rupiah relative to other major currencies ' stood at 96.1 in December, central bank data show. A level below 100 indicates a currency is undervalued.
As of October this year, export of manufactured goods in Indonesia surged 6.7 percent year-on-year to $59.4 billion in a sign that local companies benefitted from the undervalued rupiah, according to BI data.
'The weakness in rupiah is actually a boon for us and our exports,' Trade Minister Rachmat Gobel said on Thursday. 'The challenge for us is now how to produce more [exported] goods that used local contents in their inputs.'