Indonesian Rupiah hits fresh record lows as risk aversion increases

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USD/IDR rises to record highs as Middle East escalation sparks strong safe-haven demand for the US Dollar.
Sticky inflation fears reinforce expectations that the Federal Reserve will keep interest rates higher for longer.
April's trade surplus plunged to a six-year low, slashing export inflows and heavily depressing the Indonesian Rupiah.

USD/IDR trades near the record high of 18,037 reached on Wednesday. The US Dollar (USD) remains firmly on the front foot, driving the currency pair higher as a sharp escalation of geopolitical tensions in the Middle East fuels a sweeping wave of safe-haven demand. The collapse of US-Iran peace negotiations was triggered by Iran launching ballistic missiles toward neighboring Kuwait and Bahrain.

According to ABC News, the United States Central Command (CENTCOM) confirmed that it successfully intercepted a barrage of Iranian missile and drone attacks on Tuesday, while simultaneously conducting retaliatory self-defense strikes on Iran’s Qeshm Island. This escalating conflict raises the critical threat of a prolonged closure of the Strait of Hormuz, which could severely disrupt global energy markets, drive oil prices higher, and reignite global inflationary pressures.

Persistent inflation fears have reinforced expectations that the Federal Reserve (Fed) will maintain an elevated interest rate environment for an extended period. This "higher-for-longer" monetary policy outlook is heavily supported by the striking resilience of the domestic economy.

The May 2026 US ISM Manufacturing PMI climbed to 54.0 from 52.7 in the preceding two months, beating market forecasts to log the strongest factory expansion since May 2022. With the macroeconomic backdrop remaining exceptionally robust, global investors are now closely watching Friday’s upcoming Nonfarm Payrolls report to secure more definitive clues regarding the future trajectory of Fed policy.

The Indonesian Rupiah (IDR) failed to find any meaningful support from its domestic fundamentals, leaving it highly vulnerable to the Greenback's broad-based strength. The local currency was weighed down heavily by April's trade surplus data, which narrowed to its lowest level since 2020 and significantly thinned out crucial dollar inflows from exports. This weakening trade position completely overshadowed recent interventions by the Indonesian government to shore up the currency.

Despite Jakarta's aggressive efforts to bolster domestic dollar liquidity, which included implementing tighter revenue retention rules for exporters and launching a new state-owned commodity trading firm, broad market caution ultimately kept the Rupiah under pressure.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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.