Indonesia Rupiah Set for Worst Week Since June 2007; Bonds Fall

By Patricia Lui

Sept. 5 (Bloomberg) -- Indonesia's rupiah was set for its worst week since June 2007 as deepening economic slumps in the U.S. and Europe prompt investors to seek safer bets than emerging-market assets. Bonds fell for a second day.

The rupiah fell the most since mid-November last year before recovering on speculation the central bank intervened. Overseas investors sold more Indonesian shares than they bought this month and the benchmark Jakarta Composite index today reached a one-year low, sliding after the Standard & Poor's 500 Index of U.S. stocks had its largest drop in three months.

``Risk aversion is causing investors to pare their holdings of commodities and stocks, and cut their exposure to emerging markets,'' said Enrico Tanuwidjaja, an economist at Oversea- Chinese Banking Corp. in Singapore.

The rupiah was 1 percent lower at 9,345 per dollar as of 1:50 p.m. in Jakarta. The currency has lost 2.1 percent since the end of last week. It earlier fell as much as 1.3 percent, the largest daily decline since Nov. 15, 2007.

Bank Indonesia had intervened to defend the rupiah and sold an estimated $100 million dollars in early dealings, Tanuwidjaja said, adding that the decline in currency reserves last month due to rupiah buying was ``worrying''. Central banks intervene in currency markets by buying or selling foreign exchange.

Indonesia's foreign exchange reserves fell to $58.36 billion in August from $60.56 billion in July, the central bank said yesterday.

``There was a decline in our foreign exchange reserves in August as we used some of our dollars to stabilize the rupiah,'' Budi Mulya, deputy governor in charge of monetary operations at Bank Indonesia, said yesterday.

Strong Fundamentals

Rupiah's weakness today was because of losses in other Asian currencies, central bank Governor Boediono said. The economy's fundamentals are still strong and Bank Indonesia will stay in the market to support the rupiah, he said.

Ten-year bonds fell for a second day as the decline in the rupiah spurred foreign investors to sell their holdings of Indonesian debt.

``Bonds could fall further due to the weaker rupiah,'' said OCBC's Tanuwidjaja.

The central bank signaled yesterday that it will raise interest rates to contain inflation after increasing the benchmark policy rate for the fifth consecutive month this week by a quarter-percentage point to 9.25 percent. Bond prices move inversely to yields.

The yield on the 10-year note due September 2018 rose 12 basis points to 12.08 percent from 11.96 percent yesterday, according to mid-day prices from the Inter Dealer Market Association. The price fell 0.5908 or 5,908 rupiah per 1 million rupiah face amount to 82.3570. A basis point is 0.01 percentage point.

Bank Indonesia said yesterday that it remains ``on alert'' for inflation as price pressures from domestic demand are ``still strong.''

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net