A major geopolitical breakthrough occurred as Iran and Israel agreed to halt attacks on each other following a direct appeal from US President Donald Trump, injecting fresh risk-on optimism into global markets and prompting a retreat in the US Dollar (USD) worldwide [1][2]. This de-escalation acted as a headwind for the USD/JPY pair, which struggled to build on a modest uptick during the Asian session on Tuesday and remained below its highest level since April 30, despite holding above the 160.00 psychological mark [1]. Speculation that Japanese authorities may intervene to prop up the Yen, as reiterated by Finance Minister Satsuki Katayama, contributed to capping spot prices, although JPY bulls remained hesitant due to concerns about Japan's economic strain from ongoing Middle East conflict and energy supply disruptions [1]. Over the past 30 days, the Japanese Yen weakened by 2.08% against the US Dollar, according to FXStreet's currency heat map [1].
Meanwhile, the Indonesian Rupiah (IDR) continued to face pressure, with USD/IDR extending its winning streak for the fifth consecutive day and trading around 18,200, nearing the all-time high of 18,247 reached the previous day [2]. The Rupiah's decline was attributed to heightened global risk aversion, domestic fiscal anxieties, new commodity export policies, and skepticism regarding Bank Indonesia's operational autonomy [2]. BI reported foreign exchange reserves fell to a two-year low of USD 144.9 billion in May 2026, down from USD 146.2 billion the previous month, primarily due to government external debt repayments and aggressive central bank interventions [2]. Political developments under President Prabowo Subianto, including ambitious campaign promises and concerns over fiscal discipline, further eroded investor confidence [2].
Despite these macroeconomic pressures, Indonesia's local financial markets saw a brief reprieve on Tuesday, with the IDX Composite index rebounding by 4.74% to near 5,600, halting a five-session losing streak [2]. This technical recovery was driven by bargain hunters and strong domestic indicators, such as a surge in tax revenue during the first five months of 2026 and a 14% year-over-year expansion in adjusted base money (M0) for the second consecutive month [2].
Looking ahead, firming expectations that the US Federal Reserve will raise borrowing costs by the end of the year, along with uncertainty over the US-Iran peace deal, are expected to limit USD losses, prompting investors to await US inflation figures (CPI and PPI) on Wednesday and Thursday before confirming a near-term top for USD/JPY [1]. The upside for USD/IDR remains capped amid the broader retreat in the US Dollar following the Middle East de-escalation [2].
CONCLUSION
The geopolitical breakthrough between Iran and Israel has triggered a retreat in the US Dollar, impacting both the Japanese Yen and Indonesian Rupiah. While intervention risks and fiscal concerns weigh on these currencies, local market sentiment in Indonesia has shown signs of recovery. Investors remain cautious, awaiting key US inflation data and further developments in Middle East peace negotiations.