Jakarta – The Indonesian rupiah dropped sharply in panic selling Friday, breaching the psychological support level of 8,500 against the dollar before strengthening on state bank intervention, foreign exchange dealers said.

The rupiah was trading at 8,350-8,425 against the dollar in late trade, close to its opening level today of around 8,380 and well off its lows earlier in the afternoon of nearly 8,800. A foreign exchange dealer with an international bank said the currency came off its low of 8,765 in midafternoon trade.

The comeback was sparked by aggressive selling of dollars by state banks, the dealer said. "The confidence just isn't there," a forex dealer with a European bank said earlier when the rupiah was tumbling from its opening rate of around 8,390.

A forex dealer with a local bank said the currency was under continued selling pressure "as players panicked after the rupiah breached the support level of 8,500.

The selling eased slightly after President Abdurrahman Wahid said the government had its own "formula" to contain the declines if they continue.

Wahid, speaking after Friday prayers, said he was consulting with Kwik Kian Gie, the Coordinating Minister for the Economy, Finance and Industry, on the rapid weakening of the rupiah. "At the moment there is a rush for dollars by business groups that want to expatriate money overseas. This is causing the rupiah to fall."

He said the rush was due to concerns among business people about the social situation ahead of the anniversary on Sunday of the May 1998 riots, which led to the fall of former president Suharto a week later.

"We hope this [the rupiah weakness] will only be temporary," Wahid said. "The government will wait until May 15. If the rupiah rate does not [strengthen] by then, the government will take action ... We already have a formula to solve the problem of the rupiah's weakness." Wahid also said he had no plans to sack Kwik, despite his reported comments on Thursday warning foreign investors against coming to Indonesia – which foreign exchange dealers said had contributed to the rupiah's slide. "Relations between myself and Kwik are good," Wahid said. "I am not interested in replacing him."

Central bank governor Syahril Sabirin said the bank would intervene in the currency market only if intervention would be clearly effective and such an intervention would not be dependent on the level of the rupiah. "Whether we take action depends on market conditions, not on the level of the rupiah," Sabirin said.

Acting state secretary Bondan Gunawan dismissed comments that the rupiah's fall was largely because of domestic political concerns, and blamed the nervousness on the anniversary of Suharto's fall along with concerns over a US rate hike. "Rumours circulating out there are saying that there will be a [big protest] on the anniversary of the May 13 riots. It is normal that people are scared," Gunawan said.

Standard Chartered Bank's treasury analyst in Singapore Steve Brice said there were fears that if the rupiah weakens beyond 9,000 against the dollar, the Indonesian authorities would impose capital controls.

"While such measures cannot be ruled out, unlike in Malaysia, such measures would damage the economic recovery [of Indonesia]," he said in a report Friday. "Indeed, the only rationale for imposing capital controls would be if the authorities become convinced that they could not gain the confidence of international investors. As such, the imposition of capital controls would be seen as very negative as it would likely slow the reform process rather than accelerate it," he added.