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fter experiencing a breathtaking plunge for several weeks, the rupiah all of a sudden received a breath of life from the US Federal Reserve.

After its meeting last Wednesday, the Federal Open Market Committee (FOMC), while acknowledging the solid growth of the US economy, the declining unemployment and inflation rate, decided '€œnot to be impatient'€ with interest rate hike.

The Fed did not state whether or when it would raise the rate this year. The rupiah rose to Rp 12,980 to the dollar and the JCI stock index was up by 0.75 percent.

When Joko '€œJokowi'€ Widodo won the presidential election last year, most market analysts were optimistic that the rupiah exchange rate would strengthen against the US dollar. But instead the opposite happened. The rupiah continued its slide against the US dollar and its value in the US dollar reached a historic low.

Both the government and Bank Indonesia (BI) seem to be confused and do not seem to know how to respond to the steep fall.

One day they said the rupiah value was still appropriate for the economy; then they said the rupiah depreciation was good for our exports; and then they said they would conduct vigorous intervention in the market; and recently one of the BI deputy governors said he preferred an undervalued rupiah.

The confusion is understandable since the recent wild gyration of the rupiah was followed by some anomalies, which bewildered the authorities.

BI officials stated repeatedly that the rupiah depreciation was good for our exports since it strengthened our export competitiveness.

But despite continuing rupiah depreciation since last year, exports remained weak and the expected improvement in exports did not materialize.

Total export for the first two months this year fell 12 percent from the same period last year after dropping by 3.4 percent in 2014.

The rupiah kept weakening despite some improvements in the macroeconomic indicators.

The current account is still in deficit, but the amount of the deficit shrank by US$3 billion to $26.2 billion in 2014.

Indonesia experienced strong capital flow during 2014, rising more than twice to reach $25.8 billion in 2014; net foreign direct investment (FDI) was up 25 percent to $15.3 billion over the same period.

And foreign exchange reserves rose from $99.1 billion in December 2013 to $111.9 billion in December 2014. But apparently these improvements failed to counter the opposite forces that brought down the rupiah.

The prolonged rupiah depreciation could do some real damage to the economy. Prices of imported goods would go up and it could drive up inflation.

It could push up the cost of capital goods, making investment more costly. It would increase the cost of debt payments for companies that borrowed in foreign currency, worsening their balance sheets.

It could undermine macroeconomic stability, reducing incentives for investment and slowing down economic growth.

Since the persistent weakness of the rupiah could have a significant impact on the economy, it is important to look more deeply into its causes.

The first reason for the steep depreciation of the rupiah is the dramatic rise of the US dollar in recent months against other currencies. The rise of the dollar was its steepest in 40 years, and in 2015 alone, the dollar has risen by 14 percent.

The strength of the dollar reflects the growing strength of the US economy and the still weak economies of other countries.

Capital has been flowing to the US as the prospect of a rate hike becomes imminent, driving up the US dollar further.

Meanwhile, the European Central Bank (ECB) has started a stimulus program, similar to the Fed'€™s '€œquantitative easing'€ (QE) in order to jump-start economic growth in the eurozone. Japan is also doing the same.

The long-term rate is expected to go down in these countries. Central banks in Asia have also cut interest rates to boost growth.

The divergence in monetary policies in the US and in other countries, where the US is tightening and other countries are loosening, will cause the US dollar to continue rising against other currencies.

The other reason for the depreciation of the rupiah is the large current account deficit, which needs to be financed by capital inflows, but the flow of FDI has not yet been adequate to cover the deficit.

This means the Indonesian balance of payments still depends on the volatile portfolio inflows, generating a negative sentiment for the rupiah.

One of the problems with our current accounts is the deficit in services that have been structural and permanent for many years.

There is little the government can do to improve the deficits in the services in the short terms.

Therefore, improvement has to be made through improvement in the trade balance.

Here again, what matters to the market is the quality of trade balance shown through an improvement in exports.

For the last three months there has been slight improvement in the Indonesian trade balance, where it has registered small surpluses. But these surpluses did not come from higher exports.

Exports remained weak, and even exports in February was only $12.3 billion, the lowest since September 2011.

The surpluses, as it turned out, came from lower oil imports due to the significant drop in oil prices and not from deliberate government policies.

The other cause for the fall of the rupiah is probably market sentiment, which is psychological in nature, and has something to do with the market'€™s lack of confidence in the government.

Markets and investors basically still doubt the ability of the Jokowi government to implement some of his more ambitious plans to mobilize revenues, build infrastructure, reform bureaucracy and fight graft.

To improve the market'€™s perception of the economy, President Jokowi needs to work more seriously to create stronger and more credible economic management and leadership.

Fail to do that and there is a risk that the rupiah will continue to slide despite the breathing space that the Fed recently provided.
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The rise of the dollar was its steepest in 40 years, and in 2015 alone, the dollar has risen by 14 percent.
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The writer, a graduate of University of Indonesia'€™s School of Economics, is a commissioner at a publicly listed oil and gas service company. The views expressed are his own.