USD/IDR pushed to fresh record territory, trading near 18,037 after rising on strong US Dollar demand as risk aversion intensified following an escalation in the Middle East. The United States Central Command said it intercepted Iranian missile and drone attacks on Tuesday and carried out retaliatory self-defence strikes on Iran’s Qeshm Island, following reports that Iran launched ballistic missiles towards Kuwait and Bahrain. Markets have also priced the risk of disruption around the Strait of Hormuz, a channel that could feed through to higher oil prices and renewed inflation pressure.
Sticky inflation has reinforced expectations that the Federal Reserve will keep rates higher for longer, a view underpinned by firm US data. The May 2026 US ISM Manufacturing PMI rose to 54.0 from 52.7 over the prior two months, marking the strongest expansion since May 2022, while attention turns to Friday’s Nonfarm Payrolls for further policy clues. On the domestic side, the rupiah was weighed by April’s trade surplus, which fell to its lowest level since 2020 and reduced export-related dollar inflows, leaving the currency exposed despite recent measures aimed at supporting liquidity.
Positioning For A Weaker Rupiah And Rising USD/IDR
Given the current climate, we believe the path of least resistance for the Indonesian Rupiah is further weakness. The combination of a hawkish Federal Reserve and escalating Middle East tensions creates a powerful tailwind for the US Dollar. Therefore, our trading strategies in the coming weeks should be positioned for a higher USD/IDR.
We are looking at buying USD/IDR call options to capitalize on this expected upward move. This strategy allows us to capture potential upside from a depreciating Rupiah while clearly defining our maximum risk to the premium paid. The upcoming US Nonfarm Payrolls report this Friday could act as a significant catalyst, potentially pushing the pair past its recent highs near 18,037.
Global Headwinds, Energy Markets, And Domestic Market Impact
The threat to the Strait of Hormuz, through which about 20% of the world’s oil flows, is already being priced in by energy markets. Brent crude futures have surged past $115 a barrel this week, fueling the exact inflation fears that keep the Fed on hold. This mirrors the market dynamics of 2022, when aggressive Fed tightening amid geopolitical shocks sent the Dollar Index (DXY) to 20-year highs.
On the domestic front, Bank Indonesia’s ability to defend the Rupiah appears limited against such powerful global headwinds. Despite recent rate hikes, foreign capital outflows from Indonesian bond markets have accelerated, totaling over $1.2 billion in May 2026, as investors seek safety in US assets. This pattern is consistent with past episodes, like the 2013 Taper Tantrum, where local policy struggled to offset a globally strong dollar.
