US's President Donald Trump and China's President XI Jinping in their last meeting - Photo by The State Council The People's Republic of China

JAKARTA (TheInsiderStories)–The currency war threat lodged by US President Donald Trump potentially put more pressure on the rupiah exchange rate against US dollar.

The trade war threat has now escalates to the currency war threat. The currency war indication revealed by the US President Donald Trump who accused China and European Union manipulate their currencies and interest rate.

In a tweet and an interview with CNBC, Trump stated the Yuan’s currency has been dropping like a rock as the currency touched its lowest level in more than a year. Chinese Yuan weakened to the near 6.80 per US$1 on Friday (22/07). The US government suspects China’s central bank conducted a limited intervention to counter Yuan depreciation, as quoted by Bloomberg.

China is benefiting from the Yuan depreciation as it increases their consumer products competitiveness amid trade war threat from the US. Yuan depreciation will be a natural counter of a trade war as it made the Chinese’s products cheaper, even though the US imposed an import tariff for the Chinese products.

In addition, the Yuan depreciation will protect Chinese’s domestic industries as it makes the other countries’ products more expensive than local products so that naturally prevent import.

IHS Markit in a statement last week reported the significant depreciation of the Chinese yuan against the US dollar from around 6.28 in mid-February to 6.80 on 20 July does provide a significant offset to the loss in export competitiveness for Chinese exporters due to higher US tariffs.

Trump imposes an additional tariff of 10 percent for aluminium and 25 percent for steel started in June 2018. In addition, the country also imposed an additional tariff of 25 per cent for Chinese products worth US$34 billion on July 06, 2018.

The currency war threat brings impact to the other currencies in the emerging market countries, including rupiah against US dollar. Moreover, Indonesian currency may hurt badly as there are no good aspects of its domestic economy.

Indonesia’s persistent current account deficit put more pressure on the rupiah exchange rate against the US dollar, which this year is exacerbated by a trade deficit. Indonesia recorded current account deficit of US$5.5 billion, or 2.15 per cent of GDP, in the first three months this year.

In addition, the country recorded US$1.02 billion of trade balance deficit from January to June 2018, according to the Central Statistics Agency data. Export in January to June 2018 reached US$88.02 billion or increase 10.03 per cent (year to year), lower than the import that reached US$89.04 million or increased 23.10 per cent (year to year).

Foreign reserve from the trade is more sustainable to support exchange rate rather than capital flows in the capital market. The high current account deficit shows the country only has limited ability to generate foreign exchange.

Rupiah exchange rate weakened 63 points or 0.44 percent at Rp14,545 per US$1 at 15.35 WIB today (24/07), according to Bloomberg. Meanwhile, rupiah according to the  Jakarta Interbank Spot Dollar Rate (Jisdor) weakened 87 points to Rp14,541 today per US$1 from Rp14,454 per US$1 on Friday (20/07).

The rupiah was the weakest among other currencies in the Asian region in which majorities moved lower, followed by the South Korean won which fell 0.35 percent.