Rupiah drops to lowest since 1998 as US job data boosts dollar

JAKARTA (Bloomberg) - Indonesia's rupiah fell to its weakest level since 1998 as the dollar climbed after a US job report boosted odds of an increase in interest rates by the Federal Reserve by June.

Unemployment declined to 5.5 per cent in February, the lowest level in almost seven years, the US Labour Department reported Friday. A gauge of dollar strength extended gains Monday after jumping 1.2 per cent on March 6 in its biggest increase since November 2011. Bank Indonesia sees an undervalued exchange rate as helpful for exports, Senior Deputy Governor Mirza Adityaswara said March 5.

The rupiah dropped 0.7 per cent, the most since Jan. 30, to 13,069 a dollar as of 10.14am in Jakarta, prices from local banks compiled by Bloomberg show. It touched 13,073 earlier, the lowest since August 1998.

The rupiah at 12,950 to 13,000 is "normal" as a recovery in the US economy boosts the dollar, Bank Indonesia Governor Agus Martowardojo said Friday.

"The market worries that there will be further rupiah weakness after last week's comments" by central bank officials, said MS Irene Cheung, a currency strategist at Australia & New Zealand Banking Group in Singapore. "The dollar has strengthened further after the payroll report, weighing on currencies across the region." One-month implied volatility for the rupiah, a measure of exchange-rate swings used to price options, jumped 40 basis points, or 0.40 percentage point, to 12.37 per cent, the highest since Jan 21, data compiled by Bloomberg shows.

US Treasury futures showed a 72 per cent likelihood that the Fed will tighten by June, compared with 67 per cent a week ago. Fed Chair Janet Yellen has started preparing investors for an increase this year, without saying that a move was imminent. She signalled in testimony to congress that policy makers may drop their pledge to be "patient", which would mean that rates could be raised at any meeting.

Indonesia's government bonds due July 2017 gained for the first time in six days, with the yield falling 16 basis points to 6.76 per cent, according to the Inter Dealer Market Association. That's the biggest decline since Jan. 20.

ANZ predicts Bank Indonesia, which unexpectedly lowered the benchmark interest rate to 7.5 per cent from 7.75 per cent on Feb 17, to cut it again this year.