Indonesian Rupiah weakens as higher oil import costs stretch the trade balance

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USD/IDR holds ground as surging oil import costs pressure the Indonesian Rupiah's trade balance.
The US Dollar recovers losses as rising US-Iran tensions boost oil prices, triggering risk aversion and fresh inflation concerns.
The CME FedWatch Tool shows the implied probability of a September Fed rate hike falling to 44% from 50%.

USD/IDR gains ground after two days of losses, trading around 18,100 during the Asian hours on Thursday. The pair holds ground as the Indonesian Rupiah (IDR) faces downward pressure as surging oil import costs stretch the nation's trade balance and stoke inflation. This heightens market anticipation ahead of Bank Indonesia’s (BI) policy meeting next week, with traders gauging whether the central bank will unleash further rate hikes to defend the currency following its cumulative 100 basis points of tightening in May–June.

While defensive monetary action and upcoming government fiscal interventions to cap food and industrial costs offer a safety net, the IDR remains vulnerable to broader risk-off sentiment.

The US Dollar (USD) recovers its daily losses amid rising risk aversion, which could be attributed to United States (US)-Iran tensions boosting oil prices and sparking fresh inflation concerns. This geopolitical friction threatens to prolong the Federal Reserve's (Fed) higher interest rate environment.

Traders are closely assessing the Federal Reserve's policy outlook in light of recently softened US inflation data. Tuesday’s US Consumer Price Index (CPI) declined to 3.5% in June from the three-year high of 4.2% set in May, coming in well below the market expectation of 3.8%. This weaker consumer inflation data initially helped reduce immediate concerns that the Fed would soon raise interest rates.

CME FedWatch Tool suggests that markets scaled back expectations for a Fed rate hike in September, with the implied probability falling to around 44% from 50% just a day earlier. However, because the interim US-Iran peace agreement reached last month has effectively unraveled, June’s inflation data does not yet capture the economic impact of this latest military escalation between the US and Iran.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.