Rupiah Falls to Weakest Level Since 1998 as Funds Sell Stocks

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The rupiah touched a 17-year low and fell for a third week as foreign funds pulled money from local stocks on speculation quickening inflation makes an interest-rate cut less likely.

The Indonesian currency dropped 0.4 percent this week and closed little changed on Friday at 13,278 a dollar, prices from local banks show. It touched 13,300 earlier, the weakest level since August 1998. The rupiah is down 6.7 percent in 2015 in Asia’s worst performance.

Overseas investors sold a net $70 million of the nation’s stocks this week through Thursday, heading for a sixth straight week of outflows, exchange data show. Consumer prices rose 7.15 percent in May, exceeding Bank Indonesia’s estimate of 7.04 percent, and economic growth slowed to the least since 2009 last quarter. The central bank will impose fines on onshore transactions in currencies other than the rupiah starting July, according to a circular letter dated June 1.

“We could see investors reducing positions further,” said Divya Devesh, an Asia foreign-exchange strategist at Standard Chartered Plc in Singapore. “G3 rates volatility has picked up sharply, which is likely to have a spillover impact on Indonesia.”

Yields on Treasuries to German bunds surged after European Central Bank President Mario Draghi forecast faster euro-area inflation on Wednesday. Standard Chartered is underweight the rupiah in the short term and estimates it will weaken to 13,700 a dollar by the end of September, Devesh said.

Derivatives Rules

One-month non-deliverable forwards fell 0.9 percent from May 29 and declined 0.1 percent on Friday to 13,409 a dollar, data compiled by Bloomberg show.

Foreign-exchange reserves declined 0.1 percent to $110.77 billion in May, the central bank said on Friday.

Bank Indonesia is seeking to raise the proportion of derivatives to 50 percent of the $5 billion to $6 billion daily transactions in the currency market from less than 30 percent to prepare for volatility caused by higher U.S. interest rates, Nanang Hendarsah, head of the central bank’s financial market deepening task force, said in an interview in his office in Jakarta on Wednesday.

The yield on the nation’s bonds due March 2024 jumped 34 basis points from May 29 to 8.51 percent, the highest level in eight months, Inter Dealer Market Association prices show. The yield rose seven basis points on Friday.

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