The Asymmetry of Global Monetary System
The global economic system is consistently driven by the world’s most influential central bank. Data shows that global financial stability is vulnerable from chain reaction of financial strains, the currencies of Asian countries depreciated by around 0,3% in response to the rise in the United States interest rates (Sikhwal, 2022). Thus, all monetary activity in other countries hinges on one crucial factor: the decisions of the US Federal Reserve (The Fed). However, The Fed’s mandate and role are limited to maintain the US’ inflation rate and financial stability. Nevertheless, the dollar-centric global system, and compounded by highly integrated global markets, has left the global economic system in a state of asymmetry.
The policies decided by The Fed are not merely to maintain domestic financial stability, but act as a buffer against the consequences of the US actions, and power structure that have created global instability. This privilege has created hierarchy in the global economic system, which is detrimental for emerging markets such as Indonesia, as they are vulnerable to external shocks.
Dollar Hegemony and The Fed’s Spillover Effects
Nowadays, the USD has a dominant role in the international political economy, and its functions reinforce one another and perpetuate USD dominance. With the exorbitant privilege of being the main currency of trade, and reserve, USD has become the dominant currency in safe-haven demand due to it offering lower-risk returns than other currencies (Jiang et al., 2018). Therefore, during periods of crisis, global demand for USD-denominated assets often increases. With many investors viewing the USD as a safe-haven asset, this temporarily benefits the US’s external position and causes spillover effect for emerging economies to face capital outflows, as investors have had no choice but to invest in the US since there are no other capital markets comparable in the depth and availability of US assets (Gopinath & Stein, 2020).
In 2022, the United States experienced high inflation of over 9% due to a sudden increase in demand after the pandemic COVID-19, exacerbated by external factors such as Russia’s invasion towards Ukraine, which resulted in a spike in global energy prices (Cline, 2023). To lower the inflation, the Fed has no choice but to implement monetary tightening policy by raising interest aggressively from 0,25% to 5,25%-5,5% in 2022-2023, which is the highest since 2007, however since the inflation has not yet returned to the target, in the the year of 2026, the Fed maintain to hold the interest rates for higher and longer at 3,5%-3,75% (Federal Reserve Bank of St. Louis, 2026).
In May 2026, the Fed issued a statement indicating that they would hold interest rates steady, and opening the possibility of raising rates if inflation remained high due to risks caused by a fragmented global system, which is the Middle East conflict and the tensions between China and the US, which may trigger further inflation (Derby, 2026). This implies that the Fed’s policy is focused on stabilising domestic inflation, but because the USD serves as an international currency, the Fed’s policy has twofold spillover effects on other countries, which is inflation and depreciation. On the other hand, as a result of the depreciation of the local currency, emerging economies have suffered a reduction in foreign exchange reserves as a result of increased demand for foreign currency to pay for imports and foreign debt (Azelia & Desmintari, 2025). This privilege inequality narrows the policy space in emerging economies, including Indonesia as they must take actions to reduce external economic pressures.
Indonesia’s Structural Vulnerabilities
Although Bank Indonesia (BI), as Indonesian central bank, has implemented the necessary monetary policies to mitigate the depreciation of the rupiah, Indonesia’s currency depreciation may be exacerbated by structural problems within the country.
The High Cost of Adjustment
Indonesia is at risk of being stuck to recover from the depreciation. According to the vulnerability-dependence theory, Indonesia faces a higher level of vulnerability due to the high adaptation costs resulting from the US monetary policy. Compared to other Association of Southeast Asian Nations (ASEAN) countries that are also facing pressure from the Fed’s high interest rates, Indonesia is facing severest currency depreciation with the rupiah reaching 18.000 IDR for 1 USD (Widyatama, 2026). This is due to a combination of global and domestic factors, with Indonesia facing a current account deficit caused by high imports of raw materials, as well as a narrowing of fiscal space by Rp. 600 Trillion throughout 2026, which means Indonesia requires foreign capital to cover the deficit (Estherina, 2026). The need for foreign capital, amidst global uncertainty where foreign investors are likely to prefer safe-haven assets, is exacerbating the instability of the Indonesian economy. Nevertheless, on 6 June 2026, the Minister of Finance of the Republic of Indonesia held a press conference explaining that, amidst this global uncertainty, Indonesia’s fiscal-monetary coordination was being managed in a prudent and measured manner, with a controlled deficit of around 2.68% of Gross Domestic Product (GDP), and that BI will maintain the stability of the rupiah through pro-market measures and the buying and selling of government securities (Kementerian Keuangan Republik Indonesia, 2026).
Short-Term Limitation
Without adequate reserves and given its dependence on foreign capital, Indonesia has been forced to employ almost all conventional monetary instruments. Indonesia will repeatedly resort to the same policies to stem depreciation, yet this approach means that the country is able to resolve issues only on a short-term basis. Moreover, the Fed’s future decisions to set interest rates either ‘higher and higher’ or ‘higher and longer’ add to the uncertainty surrounding the stability of the rupiah.
Buffer and Management Against External Shocks
The problems caused by spillover effects in Indonesia highlight the importance of public policies that act as a buffer for Indonesia amid the risks of current global uncertainty. The Fed’s ‘higher and higher’ or ‘higher and longer’ scheme, unpredictable international relations actors behavior, along with structural vulnerabilities, has impacted economic stability in Indonesia. Faced with this reality, Indonesia must adopt an extra-prudent stance to maintain a safe position regarding both of the Fed’s schemes. Indonesia needs to evaluate its policies to align with US interest rates and restrain current external pressure. For fiscal policy, Indonesia may maintain a manageable deficit of less than 3% to keep investor trust, reduce dependence on foreign debt while focusing on tax revenue, and reducing the energy deficit by increasing domestic energy production. As for monetary policy, BI may set a safe interest rate when the Fed decides to hike interest rates further, and hold on export earnings to accumulate foreign exchange reserves. However, Indonesia must also develop long-term safeguards in case any further conflicts arise that could disrupt Indonesia’s economic stability.
To reduce vulnerability to external pressures, Indonesia must first focus on policy efficiency through monitoring and auditing its execution. Only after addressing these structural issues, Indonesia will be able to focus on the effectiveness of development policies such as industrialization and equal distribution through the expansion of budget decentralization and the energy transition. With these considerations, Indonesia can restrain currency depreciation under both the Fed’s ‘higher and higher’ or ‘higher and longer’ scenarios, also as a preventive action amidst global volatility, where conflicts could arise at any time.    Â
