USD/IDR eased after opening with a bullish gap, but stayed in positive territory near 17,880 in Asian trading on Thursday as the Rupiah found support ahead of Bank Indonesia’s policy decision. Markets have priced in a 25-basis-point increase that would take the policy rate to 5.75%, extending last week’s surprise 25-basis-point rise. The prior move came as annual inflation accelerated to 3.08% in May from 2.42% in April, pushing closer to the top of BI’s 1.5% to 3.5% target band.
The pair’s pullback also reflected softer Dollar demand as safe-haven flows cooled after the BBC reported White House confirmation that President Donald Trump and Iranian President Masoud Pezeshkian signed a preliminary memorandum of understanding aimed at ending the US-Israel war on Iran. The document followed an earlier electronic signing of an initial framework by Vice President JD Vance and Iranian parliamentary speaker Mohammad Bagher Ghalibaf. Still, the Dollar could regain ground if expectations for tighter Fed policy strengthen, after the June Summary of Economic Projections showed half of FOMC members anticipate at least one rate hike this year.
Bank Indonesia’s Expected Response and Short-Term Market Implications
With Bank Indonesia meeting today, we anticipate the expected 25-basis-point rate hike to provide temporary strength to the Rupiah. This aggressive stance is necessary as the USD/IDR pushes towards 17,900, a level far exceeding the panic highs of around 16,500 seen during 2020. The recent jump in inflation to 3.08% gives the central bank a clear mandate to act decisively to defend the currency.
In the immediate term, this creates an opportunity to position for a slight pullback in USD/IDR. We see value in short-dated options that profit from the Rupiah’s stabilization, as BI’s commitment has been clearly signaled with last week’s surprise hike. However, any strength in the Rupiah should be viewed as a short-term reaction, not a change in the underlying trend.
Broader Geopolitical And Federal Reserve Dynamics
The geopolitical news regarding a US-Iran memorandum is creating a temporary dip in the US Dollar, but we believe this is a distraction from the main driver. The Federal Reserve’s hawkish outlook is the more powerful force at play, with policymakers signaling at least one more rate hike in 2026. The US labor market remains robust, with recent Nonfarm Payrolls data continuing to show job gains well over 200,000 per month, supporting the Fed’s case for keeping rates higher for longer.
This divergence in policy creates a fundamental tension that will likely favor the US Dollar over the coming weeks. Historically, periods of Fed tightening have consistently drawn capital away from emerging markets, putting sustained pressure on currencies like the Rupiah. Bank Indonesia can slow the Rupiah’s depreciation, but it cannot reverse the trend set by the Fed alone.
Therefore, we should use any BI-induced strength in the Rupiah as an opportunity to build long USD/IDR positions. We recommend buying call options on USD/IDR with expirations in the next one to three months, targeting a move above the 18,000 level. The underlying strength of the US economy suggests that the path of least resistance for the pair remains upward.
