Rupiah Hits Record Low Above 18,200 Per Dollar as US Currency Strengthens and MSCI Threat Looms

Since Bank Indonesia's reference rate set a record close of Rp 18,183 per dollar on Oct. 28, the rupiah has kept sliding. On Thursday, Nov. 12, it broke through its June record to a fresh all-time low.

The size of the move depends on the quote. Bloomberg data showed the rupiah weakening as much as 0.3% to 18,204 per dollar, past the early-June record of about 18,190. Another account of the Jakarta opening put the spot rate at 18,247, down 98 points or 0.54% from Wednesday's close of 18,149. That figure also topped the 18,188 record logged June 8.

Either way, the currency is down more than 8% against the dollar this year. It is the worst performer in Asia.

A stronger dollar and a Fed that may hike again

The external driver is the dollar. The US dollar index rose to roughly 102.8 to 102.9 after higher-than-expected US inflation data. Markets now expect the Federal Reserve to resume raising interest rates next month.

MUFG Bank senior currency analyst Lloyd Chan said the rupiah is "in an extremely vulnerable position" as external and domestic sentiment worsen at the same time. He warned that "prolonged political uncertainty risks increasing Indonesia's risk premium, leaving the rupiah highly vulnerable while expectations for the Federal Reserve remain hawkish."

Other Asian currencies fell too, but by less. The Philippine peso lost 0.64%, the Malaysian ringgit 0.26%, the Thai baht 0.16% and the Indian rupee 0.07%. The South Korean won gained 0.3% and the Chinese yuan 0.08%.

The MSCI proposal

The domestic problem is bigger than one day's trading. In October, MSCI proposed reclassifying Indonesia from an emerging market to a standalone market, citing persistent investability concerns. That would effectively pull Indonesian stocks out of its emerging-market indexes.

Goldman Sachs estimated about $5.6 billion in passive outflows if that happens. Earlier this month, the 10-year government bond yield climbed to a six-year high and the Jakarta Composite Index fell to its lowest level since 2020.

On Thursday the index rose 0.8% and the 10-year yield held at 7.62%. Foreign investors have continued to sell Indonesian assets, according to the IDN Financials report on the session.

OCBC remains cautiously negative on the rupiah after the proposal. It expects Bank Indonesia intervention to cap volatility, but says a sustained recovery needs clearer reforms. It flags 18,190 as key resistance.

Reports of a Gibran resignation

Chan's note on Thursday also cited reports that Vice President Gibran Rakabuming Raka submitted his resignation letter to President Prabowo Subianto on Wednesday. IDN Financials described the market reaction as driven partly by speculation over that resignation.

Neither Gibran nor Prabowo is quoted confirming it. Treat it as an unconfirmed report. Currency traders are pricing the possibility regardless.

Oil and the budget

Oil is the other drag. Global crude prices were above $115 a barrel on Oct. 28, amid the Middle East conflict. Indonesia subsidizes fuel, so higher prices raise the government's subsidy bill and widen the fiscal gap.

US benchmark WTI traded around $101.86 early Thursday in Asia, after a 3% jump on Wednesday. Iran says the US must lift its blockade of Iranian ports before peace talks can start. Washington wants Iranian concessions on its nuclear program. Neither side has moved.

Policy uncertainty and the risk of a sovereign rating downgrade also weigh on Indonesian assets, according to Bloomberg's account of the session.

What Bank Indonesia says

Bank Indonesia disputes the idea that the rupiah's weakness is a domestic story. Erwin Gunawan Hutapea, head of its Monetary Management and Securities Department, said on Oct. 28 that the rupiah's moves "remained broadly in line with regional currencies."

The central bank says it is intervening in spot foreign exchange, offshore non-deliverable forwards and domestic non-deliverable forwards. It has also bought government bonds in the secondary market. Foreign exchange reserves stood at $146.3 billion at the end of September.

Thursday's regional moves complicate the in-line argument. The won and yuan strengthened while the rupiah hit a record low. The central bank has said it is monitoring capital outflows since the MSCI announcement.

What comes next

Two events will test the currency. The first is the Fed's December meeting, where a rate hike is now expected. The second is MSCI's final decision on Indonesia's market classification, which would trigger the passive outflows Goldman estimates at $5.6 billion. Whether Gibran has actually resigned, and who would replace him, is the third open question.