Singapore – The Indonesian rupiah firmed on Friday, outperforming its Asian peers as sentiment towards the currency continued to improve, but dealers said the currency needed more government action to stabilise it for the long term.

A retreat in oil prices and aggressive monetary tightening by the central bank have helped stabilise the rupiah, which hit a 4-year low against the dollar last week.

Dealers said the rupiah was trading at 10,310 per dollar, about half a percent stronger than late Asian trading levels on Thursday. One Jakarta dealer said local banks, short of the rupiah, were buying the local currency.

The rupiah has recovered more than 10 percent since hitting a four-year low of 11,750 per dollar on Aug. 30.

Indonesia imports large amounts of oil while holding domestic prices low under a subsidy programme. It has been forced to sell rupiah for dollars to pay for oil imports, hurting the rupiah, the economy and budget as world oil prices have soared.

Oil prices have eased this week to about $65 a barrel from record highs close to $71 last week. Indonesia on Tuesday lifted its target for key 1-month interest rates by half a percentage point to 10 percent, its second rate rise in a week, to boost the rupiah's appeal.

News on Friday that Fitch Ratings is comfortable with its ratings on Indonesia, also helped support the rupiah.

But analysts said the market would continue to look to the government for decisive action on fuel subsidy cuts before taking a bullish position on the currency.

"The government has to do something, if they don't and we get a Fed hike and oil prices resume their rally then Indonesia will be caught again," said Claudio Piron, currency strategist at JPMorgan.

"What is mitigating the situation is that Bank Indonesia is really showing itself to be up to the task and this is helping offsetting the ambivalence we are getting from Jakarta." Indonesia may bring domestic fuel prices in line with world market levels in one year's time but expensive and politically sensitive subsidies are likely to be lifted only gradually, a government minister said on Thursday. A trader in Jakarta said he expected the rupiah to struggle as the dollar strengthened against major currencies.

"Sentiment is neutral and there is a wait and see feeling about what the government will do next," he said.