T

he rupiah and other global currencies will remain volatile until the US central bank raises its interest rate, a senior Bank Indonesia executive has said.

The central bank'€™s senior deputy governor Mirza Adityaswara said that the global currency markets, which include the rupiah, would become more stable after the US increased its interest rates.

Until then, BI would maintain a cautious monetary policy stance to guard the rupiah'€™s stability, he said in an interview last week.

Having depreciated to a decade-low level of 13,237 per dollar in March, the rupiah strengthened to 12,838 per dollar last week, according to data from the Jakarta Interbank Spot Dollar (JISDOR).

The currency then weakened again over the last few days, trading at 12,952 per dollar on Wednesday. Analysts from BNP Paribas have forecasted that the currency could weaken again to as much as 13,800 per dollar by the end of this year.

Volatility in global exchange rates was among the important challenges that global economic policymakers must face, G20 finance ministers and central bankers wrote in a communiqué released after their meeting last week. Uncertainty over monetary policy in the US, coupled with the Federal Reserve'€™s refusal to clarify when it will raise its interest rate, has caused volatility in the currency markets.

William C. Dudley, president of the Federal Reserve Bank of New York, said Monday that he was hopeful the central bank would raise its benchmark short-term interest rate this year despite recent weak economic data. Dudley is a voting member of the policy-making Federal Open Market Committee, which could decide to increase the interest rate as early as June, the LA Times reported.

'€œThe continuation of uncertainty in the US around rates, combined with an appreciating dollar, is creating headwinds for businesses that are significantly exposed to Asian currencies,'€ Dianne Challenor, JPMorgan'€™s head of treasury services for Asia-Pacific, said in an emailed statement.

'€œMargins are being squeezed and hedging strategies are challenging to get right, adding complexity to risk management planning.'€

BI has urged Indonesian companies to anticipate volatility in the currency by performing hedging '€” a banking service whereby investors pay a specific premium to ensure their dollar-denominated debts and expenses do not swell if the rupiah weakens.

However, compared with other economies in the region, Indonesia has relatively high costs for hedging, mainly because of the rupiah'€™s volatility.

The rupiah'€™s one-month implied volatility, a measure of currency swings, stood at 12 percent at the end of March, Bloomberg data show. That was among the highest in Asia, with volatility in the Malaysian ringgit standing at around 9 percent while for the Indian rupee it stood at approximately 5 percent.

Onshore one-month forward implied yields, an indication of hedging costs, have increased by nearly 300 basis points since mid-March to 9 percent as of mid-April, according to data compiled by ANZ Bank.

'€œAt current levels, it is expensive for foreign investors to hedge their forex exposures to Indonesian assets,'€ noted Irene Cheung, a currency strategist with ANZ Bank.

'€œThe spike in onshore yields may already indicate strong hedging demand among foreign investors who are less than comfortable with exposure to the local currency.'€