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Investing.com - The Indonesian rupiah (IDR) has seen a sharp decline in its nominal effective exchange rate (NEER) index this year, according to Bank of America (BofA) analysis released this week.
BofA attributes the IDR’s underperformance to several factors, including its sensitivity to Federal Reserve policy rates and U.S. yield curve pricing. Higher market volatility and risk aversion have also led to equity outflows from Indonesia.
The bank notes that market participants have focused more on high USD beta currencies with large external assets or current account surpluses, which create immediate hedging needs. Currencies benefiting from potential trade deals have also received more attention than the rupiah.
Despite these challenges, BofA believes conditions are favorable for the IDR to catch up with peer currencies. The bank cites an entrenching USD downtrend that could reduce dollar hoarding and improve conversion on export proceeds as a key factor.
BofA also suggests that a weaker dollar environment would allow Bank Indonesia (BI) to ease monetary policy to stimulate economic growth, while continuing to attract debt portfolio flows into Indonesia.
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