Indonesian Rupiah struggles as traders adopt caution ahead of Fed decision

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USD/IDR gains ground after two days of losses, trading around 17,770 during the Asian hours on Wednesday. The pair appreciates as the Indonesian Rupiah (IDR) faces challenges as traders adopt caution ahead of the Federal Reserve (Fed) policy decision due later in the day.

USD/IDR rises as the Indonesian Rupiah weakens ahead of the Federal Reserve's upcoming policy decision.
The Fed is expected to hold its benchmark interest rate steady at 3.50% to 3.75%, maintaining a cautious stance.
Traders expect Bank Indonesia to maintain a hawkish tightening bias on Thursday to protect the weakening Rupiah.

The US central bank is widely expected to maintain a cautious "wait-and-see" approach, keeping its benchmark interest rate unchanged within the 3.50% to 3.75% range. Traders expect Fed Chair Kevin Warsh to adopt a more hawkish tone during his first policy meeting.

The upside of the USD/IDR pair could be limited as risk aversion eases amid growing expectations of a breakthrough peace deal between the United States (US) and Iran. US Vice President JD Vance stated on Tuesday that President Donald Trump may release a preliminary agreement to end the war ahead of schedule, following the president's earlier comments that the framework had already been signed.

Meanwhile, Iranian Foreign Minister Seyed Abbas Araghchi confirmed that a new round of negotiations aimed at reaching a final, comprehensive peace deal is set to begin in Switzerland.

The Indonesian Rupiah (IDR) could face further challenges as falling foreign exchange reserves highlight the rising cost of central bank intervention. However, traders expect the Bank Indonesia (BI) to maintain a hawkish tightening bias on Thursday to defend the currency.

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.