Indonesian Rupiah weakens as hawkish Fed tone lifts US Dollar

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USD/IDR gains ground for the third successive day, trading around 17,980 during the Asian hours on Wednesday. The pair appreciates as the US Dollar (USD) strengthens on expectations of further Fed tightening.

USD/IDR rises as the US Dollar strengthens on market expectations of further Federal Reserve interest rate hikes.
CME FedWatch tool indicates that markets are pricing in a nearly 85.5% chance of a Fed hike in December.
The Indonesian Rupiah weakens as cautious traders await June CPI data next week.

The CME FedWatch tool indicates that the markets adjusted expectations for a more hawkish stance from the Federal Reserve (Fed). Traders are now pricing in a nearly 85.5% chance of a Fed hike in December, up from 61% before last week’s FOMC meeting.

US S&P Global Composite Purchasing Managers’ Index (PMI) climbed to 52.2 in June, comfortably beating May’s reading of 51.5 and signaling healthy business expansion. The US manufacturing sector showed remarkable resilience, with output jumping to 55.7 from the previous month's 55.1, easily outperforming forecasts of 54.8. Simultaneously, the Services PMI printed at 51.3, ticking up from May's 50.7 and clearing the consensus estimate of 51.0, proving that demand in the broader service economy remains incredibly sticky.

The Greenback also receives support from the uncertainty surrounding the United States (US)-Iran peace deal. US President Donald Trump stated that Iran had "fully and completely" agreed to open its facilities to nuclear inspections, while Iranian Foreign Minister Abbas Araghchi quickly tempered expectations by clarifying that substantive nuclear negotiations have not actually begun.

Moreover, Iran’s chief negotiator issued a stern warning that the strategic Strait of Hormuz will never return to its pre-war status and will remain firmly under Iranian oversight. Meanwhile, diplomatic efforts showed signs of progress elsewhere as Washington hosted a fresh round of talks between Israel and Lebanon, aimed at securing a ceasefire with Iran-backed Hezbollah.

The Indonesian Rupiah (IDR) is under pressure as traders exercise caution ahead of next week's June CPI data, amid fears that rising food costs will sustain inflationary pressures. This follows a sharp acceleration in annual inflation to 3.08% in May from 2.42% previously. Additionally, major Japanese automakers might relocate production to Vietnam, threatening future foreign inflows into Indonesian markets.

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.

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