Friday, 14 December 2018 | 17:02 WIB

Rupiah Strengthens as Trade Tension Eases, Dollar Weakens

Illustration: Rupiah and Dollar

JAKARTA, NNC - Various financial markets felt relief because the United States proposed new trade negotiations with China. This news is close to the spotlight that the US and Canada are getting closer to a trade agreement, which makes the dollar weaker against other currencies.

A research conducted by FXTM said that trade tension has long been seen as a driving factor for dollar appreciation, and indications that the Trump administration is not too aggressive in triggering trade tension are considered negative for the dollar.

Chinese yuan strengthened on news that Washington was communicating with Beijing to continue trade negotiations, and various emerging market Asian currencies also strengthened due to increased risk appetite.

"This is not the first time we have seen optimism because of the Washington and Beijing negotiations, which then actually increase trade tension, but investors seem to want to remain optimistic that an agreement on this protracted problem can be reached soon," said Lukman Otunuga, FXTM Research analyst, Friday (9/14/2018).

This discourse in general is a positive step because both parties are willing to reduce tensions between the two largest economies in the world.

In Indonesia, the rupiah strengthened slightly due to optimism about improving US-China relations and a weakening dollar. Although the rupiah can strengthen in the short term, the rise remains threatened by a variety of external factors.

The Federal Reserve is expected to increase interest rates this month and turmoil in emerging markets weighs on market sentiment, so the rupiah remains vulnerable to depreciation.

Bank Indonesia has raised benchmark rates four times since mid-May in an effort to prevent the rupiah from weakening.

"There is a possibility that BI will act again this year, especially given that the US is still likely to increase interest rates twice more. Although BI rate hike can help the rupiah, this action can have a negative impact on economic growth," Lukman said.

In other parts of the world, the dollar weakened against a basket of major currencies as disappointing economic data reduced expectations of a potential US interest rate hike in December. Trade tension remains the main driving factor for the dollar in the medium and long term.

An indication of optimism about trade will be considered to encourage increased risk sentiment, and can make investors to reduce ownership of the safe haven dollar.