Dollar's Four-Week Rally Ends; Indonesian Rupiah Tumbles on MSCI Downgrade Threat

The U.S. dollar snapped a four-week winning streak this week, pressured by a flight to safety in U.S. Treasuries, while the Indonesian rupiah plunged to its lowest level since July after a proposed market status downgrade from index provider MSCI.

Dollar Retreats on Shifting Sentiment

The U.S. Dollar Index, which measures the greenback against a basket of major currencies, fell 0.2% on Friday to 101.862, bringing its weekly loss to approximately 0.4%. The decline marked an end to the dollar's longest weekly winning streak since May of last year, according to market data.

The pullback was driven by a rapid shift in market sentiment that saw investors seek the safety of long-duration U.S. government bonds. This safe-haven bid, reportedly fueled by concerns over leverage and capital expenditure returns in the artificial intelligence sector, pushed the benchmark U.S. 10-year Treasury yield down to around 5.08%, its lowest since late September. The falling yields compress the interest rate differential that has recently supported the dollar.

Dovish commentary from several Federal Reserve officials also weighed on rate hike expectations. According to the CME FedWatch Tool, money markets are now pricing in a 28% probability of an interest rate increase at the Fed's late-October meeting, prompting traders to exercise caution in chasing the dollar higher.

Indonesian Assets Hammered by Downgrade Proposal

In Asia, Indonesian assets experienced a severe sell-off after index provider MSCI proposed reclassifying Indonesia from an "Emerging Market" to a "Standalone Market." MSCI cited long-standing issues with the country's investability and corporate governance as reasons for the potential downgrade.

The news triggered a dramatic market reaction:

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• The Indonesian rupiah fell to its lowest level since July, approaching 18,070 per U.S. dollar.
• The Jakarta Composite Index plummeted 11% in a single session, marking its largest one-day drop since the 1998 Asian financial crisis and hitting a six-year low.

A formal downgrade would have significant implications for capital flows. Billions of dollars in passive investment funds and exchange-traded products that track the MSCI Emerging Markets Index would be forced to liquidate their holdings in Indonesian assets, creating sustained selling pressure.

Moves in Other Major & Asian Currencies

Elsewhere in currency markets, the euro gained ground, with EUR/USD rising 0.2% on Friday. The move puts the single currency on track for its first weekly gain in six weeks, lifting it further from a 17-month low hit earlier in the week.

Meanwhile, the Japanese yen traded in a narrow range against the dollar, with USD/JPY down about 0.2% for the week. The pair's upside near the 158.00 level was capped by lower U.S. yields and persistent warnings of potential intervention from Japanese authorities.

In contrast, the Indian rupee was a regional outperformer, posting its best weekly performance since March. The currency's strength was attributed to aggressive intervention by the Reserve Bank of India (RBI), which included opening a dedicated U.S. dollar supply window for state-owned oil companies and tightening rules on currency derivatives.