Indonesian Rupiah Drops Most in a Month on Fed Rate Speculation

Indonesia’s rupiah fell the most in a month as the Federal Reserve’s decision to end its stimulus program spurred bets it’s on course to raise interest rates.

The Fed cited an improving U.S. labor market as it halted bond purchases, known as quantitative easing, that drove fund flows to emerging markets, according to a statement in Washington yesterday. Indonesian Finance Minister Bambang Brodjonegoro said in an interview yesterday that his priority is to maintain the nation’s resilience to a possible increase in U.S. rates, by reducing local fuel subsidies before year-end.

“The Fed’s decision to end QE shows it remains on track to normalizing its monetary policy,” said Heru Irvansyah, an economist at PT BNI Securities in Jakarta. “This will cause a shift of funds from emerging markets to the U.S., which will put some pressure on onshore dollar supply.”

The rupiah dropped 0.6 percent, most since Sept. 29, to 12,149 per dollar as of 9:31 a.m. in Jakarta, prices from local banks show. In the offshore market, one-month non-deliverable forwards lost 0.5 percent to 12,215, 0.5 percent weaker than the onshore spot rate, according to data compiled by Bloomberg.

The Federal Open Market Committee maintained yesterday its commitment to keep rates low for a “considerable time.”

Bank Indonesia set a fixing used to settle rupiah forwards at 12,163 yesterday, with today’s rate due at 10 a.m. in Jakarta. One-month implied volatility, a measure of expected exchange-rate swings used to price options, dropped seven basis points, or 0.07 percentage point, to 9.05 percent, according to data compiled by Bloomberg.

The nation’s 8.375 percent bonds due March 2024 fell for a fourth day, pushing the yield to rise two basis points to 8.13 percent, according to the Inter Dealer Market Association. That’s the highest level since Oct. 17.

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