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The Link Between the U.S. and the Indonesian Economies (and Their Currencies)

As the world and its population grow larger, it becomes increasingly compact in terms of interconnectivity and the distance that exists between individual nations.

This has created an economic and financial landscape in which cause and effect are dominant, and where the behaviour of developed nations has a direct impact on emerging and even frontier economies.

The link between the U.S. and the Indonesian economy offers a relevant case in point, and in this article we will explore this in greater detail while appraising the current climate.

The State of the Nation: Interest Rates and Slow Growth in Indonesia

 At first glance, it may seem as though the Indonesian economy is prospering. After all, South East Asia’s largest economy grew by a reported 5.01% during the first financial quarter, matching the forecasts established by analysts at the end of 2016. Many experts cited these figures as disappointing, however, highlighting long-term weaknesses that continue to undermine the national economy.

This reflects the true state of the economy, while it is also expected to serve as a central focus when Indonesia’s central bank meets to discuss the base interest rate and monetary policy later this week.

If the central bank does decide to maintain its base rate, however, the performance of the economy and its growth portents are just two of many factors that will be taken into consideration. In fact, the monetary policy adopted by the U.S. will also be a key consideration, especially with the Fed expected to increase the base interest rate for the second time this year at their next meeting in June. This decision will be taken on the back of a healthy labour market and robust wage growth of 2.6% during the last year.

Exploring the Macroeconomic Relationship Between the U.S. and Indonesia

 This brings us on to the topic of macroeconomics, which defines the relationship that exists between the U.S. and a developing economy like Indonesia. Higher interest rates, such as those currently being deployed by the U.S., often occur in line with rising inflation, which has gripped the U.S. and other developed economies during the last quarter. These rates tend to attract foreign investment, which in turn creates a spike in demand for the affiliated nation’s currency. Currency pairings for the Indonesian Rupiah and the U.S Dollar can be closely followed through trading platforms such as LCG. Due to the unpredictable economic factors, some investors will be looking to take advantage of such developments.

This is evident in this instance, as brokerages recently confirmed that the Indian Rupee (INR) continues to trade narrowly against a strong and resilient U.S. Dollar (USD).

So, why is the Indonesian government looking to maintain a low interest rate while the U.S. increases theirs? In short, it is looking to cap inflation and actively restrict the growth of the INR, creating a scenario where the country can drive more competitive exports to nations such as the U.S. So long as the base rate is carefully managed and monitored over time, this can help to stimulate economic growth while boosting exports and many of the nation’s industries.

Why the Future May See a Different Dynamic

While this climate is likely to remain unchanged for the foreseeable future, we may well see an entirely different dynamic emerge as 2017 progresses. This is thanks to the protectionist agenda of U.S. President Donald Trump, who is known to favour a slightly weaker USD that can underpin his plans to increase American exports across the globe. This could impact directly on Indonesia’s own exports and impact heavily on the relationship between the two nations, while drastically reducing the U.S. government’s investment in the region.

This may prove to be bad news for Indonesia, while it may also impact negatively on currency investors who have come to rely heavily on the growth of the USD.