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The Indonesian rupiah rallied sharply from its weakest level in nearly three years on Tuesday, propped up by the central bank's monetary tightening to rein in inflation even as rates around the world are being cut to soothe troubled credit markets.
Indonesia's 25 basis points rise in the overnight policy rate to 9.5 percent came on the same day that Australia stunned markets with a deep 1 percentage point rate cut and a day after India cut reserve requirements for banks hurting from the global credit crisis.
But analysts said that monetary tightening was necessary to stall the heavy selling of Indonesian assets by foreigners who are worried about soaring inflation, running at above 12 percent on an annual pace, in the Southeast Asian nation.
"It will help the rupiah," said Tim Condon, a strategist at ING in Singapore, adding inflationary expectations remained elevated in the country. "The central bank needs to show they are not indifferent to that state of affairs." The Jakarta stock index has fallen 40 percent this year.
Analysts at J.P. Morgan said in a note the jump in offshore non-deliverable forwards to 10,000 rupiah/dollar for one-month contracts showed the "selling pressure was firm" in a market which has a heavy concentration of foreign bond holdings. Elsewhere, the South Korean won plunged further to touch 7-1/2-year lows, extending losses as investors sold Korean stocks and a deepening shortage of dollar funding and fear of credit risk spurred even more won selling.

Copyright Reuters, 2008

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