Indonesia’s rupiah has weakened by 13.9% against the U.S. dollar since June to become the worst performing currency in Asia since then.
Bank Indonesia has recently undertaken its most aggressive policy of monetary tightening in almost a decade, along with many other developing countries who have also taken similar measures. Central banks in Asia and South America have looked to support their currencies as policies in the United States have prompted a sell-off in emerging market equities.
“The current-account deficit is the main factor in the rupiah’s decline, not just from its direct impact on foreign-exchange supply, but also from the confidence channel”, said Euben Paracuelles, who is an economist at Nomura Asset Management’s Singaporean division. “Nomura forecasts the deficit to narrow in second half of 2013, but it is the capital outflows amid Fed tapering concerns that could be more dominant for the rupiah.”
Indonesia’s reserves are close to the lowest level they have been in almost three years, and USD$2.6 billion worth of foreign investment in Indonesian equities have been sold since June. In July, The country reached 16 straight months of declining exports in June which led to a record trade deficit during that month.