Rupiah Weakens to Worst Level Since October 2020

rupiah and us dollar
rupiah and us dollar

Trading Tuesday (14/6) opened with the Rupiah dropping to its lowest level in 18 months (since October 2020). The rupiah weakening was caused by external pressure or international sentiment that continued to pressure Indonesia.

According to Refinitiv data, at 9:22 WIB the rupiah fell 0.57% to Rp 14,762/US$. This position is the weakest since October 5, 2020.

Not only that, the rupiah fell when several Asian currencies were able to strengthen. Inevitably, the rupiah was again the worst in the Yellow Continent.

Rising inflation in the United States is the cause of the collapse of the rupiah. Inflation based on the consumer price index (CPI) in the US in May 2022 rose 8.6% year-on-year (YoY). The inflation rose from the previous month’s 8.3% (YoY) and was the highest on record since 1981.

When inflation is high, people’s purchasing power will decrease. Household consumption, which is the backbone of the economy, will be hit.

In order to reduce inflation, the Fed will be very aggressive in raising interest rates. At the end of this year, the Fed’s interest rate is expected to be at 2.75% – 3%.

Interest rates are in a neutral position, meaning they are not spurring economic growth but also not slowing down. The figure is estimated to be 2.5%.

This means that if the Fed’s interest rate is above that, the economy can slow down because the expansion of the business world and household consumers will be increasingly restrained.

If the high-interest rate inflation has not slowed down, then the United States is in danger of experiencing another recession.

Signs the United States will experience a recession are getting stronger after the yield of US bonds (Treasury) experienced another inversion last Monday. This means that throughout this year, there have been 2 inversions.

The inversion occurred after the 2-year Treasury yield was higher than the 10-year tenor, although it only lasted for a moment. Under normal conditions, the yield of a longer tenor will be higher, when an inversion occurs the position is reversed.

Previously, an inversion also occurred in April and became a strong signal of a recession in the United States in the next 6 to 24 months.

Indonesia is not at risk of experiencing a recession, but when the US economy declines, the domestic gross domestic product (GDP) will also be dragged down.

In addition, the risk of a recession actually makes the demand for the US dollar as a haven increase. This ultimately made the rupiah slump.