Indonesian Rupiah gains support amid financial hub plans, geopolitical tensions ease
- USD/IDR depreciates as Indonesian market sentiment improves due to the proposed PFII financial hub in Jakarta.
- Moody's warned of persisting downside risks despite temporary diplomatic efforts to avoid a broader conflict.
- The US Dollar weakens as risk aversion eased following proposed mediator plans for a 10-day US-Iran ceasefire.
USD/IDR continues its losing streak for the sixth successive day, trading around 17,940 during the Asian hours on Tuesday. The pair depreciates as the Indonesian Rupiah (IDR) finds support following positive market sentiment after the news that Indonesia International Financial Center (PFII) projects aim to position Jakarta as a competitive regional financial hub by allowing transactions to be conducted in foreign currencies and adopting English as an operating language.
However, the Indonesian Rupiah's gains were somewhat capped as traders exercised caution ahead of Bank Indonesia’s (BI) upcoming policy decision. The central bank commenced its two-day meeting after having already raised interest rates by a cumulative 100 basis points between May and June to bolster the domestic currency. Further pressure mounted from rising global oil prices, which stoked fiscal concerns despite Indonesia's budget execution remaining broadly on track for the first half of 2026.
Adding to the cautious atmosphere, Moody’s Ratings maintained a wary outlook on Indonesia, citing ongoing policy uncertainty and risks to fiscal sustainability. Martin Petch, a Vice President in Moody’s sovereign risk division, noted that the balance of risks has turned slightly more negative since the agency downgraded Indonesia’s outlook to negative in February. He highlighted that fiscal outcomes for both this year and next are facing heightened strain due to significantly increased subsidy costs, particularly following the escalation of the Iran war.
The US Dollar (USD) struggled as risk aversion eased following emerging diplomatic signals. Iranian officials reported receiving mediator proposals aimed at de-escalating tensions with the United States, with reports even hinting at the possibility of a 10-day ceasefire.
According to Axios reports, US President Trump is currently weighing a decision between a temporary ceasefire to reopen the strategically crucial Strait of Hormuz and launching a full-scale joint military campaign alongside Israel, all while US forces continue to assemble in the region as talks progress.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
