• Indonesian Rupiah drops amid rising economic headwinds before MSCI decides on Indonesia's emerging market status.
• Goldman Sachs projects a downgrade could trigger up to $13 billion in total capital outflows from Indonesia.
• The US Dollar holds ground amid a hawkish sentiment surrounding the Fed policy outlook.

USD/IDR extends its gains for the second consecutive day, trading around 17,900 during the Asian hours on Tuesday. Meanwhile, severe economic headwinds are building for Southeast Asia's largest economy. Index provider MSCI is scheduled to announce its highly anticipated decision regarding Indonesia's emerging markets status on Tuesday. This decision follows a stark review last week in which MSCI raised serious flags over the country's investability.

If MSCI follows through with a downgrade, it is expected to trigger immediate capital flight and severely complicate the central bank's efforts to stabilize the Indonesian Rupiah (IDR). Goldman Sachs estimates that the potential fallout could spark up to $13 billion in total capital outflows.

The USD/IDR pair gains ground as the US Dollar (USD) continues to outperform, driven by firm market expectations that the Federal Reserve (Fed) will raise interest rates this year.

These hawkish bets intensified following last week’s FOMC Economic Projections report, which revealed that nine out of 19 policymakers foresee a rate increase in 2026. Momentum grew further after Kevin Warsh, presiding over his first meeting as Fed Chair, caught the market off guard by adopting a significantly more hawkish stance than anticipated.

Market pricing heavily reflects this outlook, with the CME FedWatch tool indicating an 87% probability of a rate hike before the year ends. To gauge the next steps for US monetary policy, investors are closely watching Thursday’s release of the May Personal Consumption Expenditure (PCE) Price Index, the Fed's preferred inflation metric.

However, the Greenback's upside could be capped by a broader easing of risk aversion. This shift is tied to ongoing diplomatic progress between the US and Iran, which has helped cool global inflation fears. On Tuesday, CNBC reported that US Vice President JD Vance noted negotiations have made "great progress," despite some lingering friction.