Rupiah Drops After Funds Cut Bond Holdings on Inflation Outlook

Indonesia’s rupiah snapped a two- day gain after global funds cut holdings of the nation’s bonds on concern a government plan to raise fuel prices will stoke inflation in Southeast Asia’s biggest economy.

Overseas investors sold 2.6 trillion rupiah ($282 million) more local notes than they bought this month after President Bambang Susilo Yudhoyono said on Feb. 22 that local energy prices need to be revised because of higher crude prices globally. The government raised its target for consumer-price increases this year to 7 percent from 5.3 percent, according to a document presented to parliament on March 7.

“The rupiah will still tend to weaken as we are seeing a lot of orders from banks to buy the dollar,” said Dave Hartono, a Jakarta-based foreign-exchange trader at PT Bank ICBC Indonesia. “They are waiting to see how inflation will play out.”

The rupiah declined 0.2 percent to 9,163 per dollar as of 4:01 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. The currency lost as much as 0.6 percent earlier, the most since March 12.

The currency’s one-month implied volatility, which measures exchange-rate swings used to price options, gained 39 basis points from a seven-month low to 8.25 percent.

The yield on the government’s 7 percent bonds due May 2022 fell three basis points, or 0.03 percentage points, to 5.90 percent, according to closing prices from the Inter Dealer Market Association. The yield reached 6.02 percent last week, the highest since Jan. 17.

To contact the reporters on this story: Yudith Ho in Singapore at yho35@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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