Aditya Suharmoko and Ika Krismantari, Jakarta – The rupiah suffered its biggest daily drop in nearly 10 months on Friday, falling by 1.3 percent to close at 9,375 against the US dollar, a drop the central bank has attributed to recent gains by the greenback.

The fall on Friday capped the 2.4 percent decline the local currency suffered throughout the week, its biggest weekly decline since June 2007, according to Bloomberg data. But despite the numbers, the central bank insists the rupiah remains fundamentally strong.

"It is a global condition. The dollar is strengthening against all other currencies. The rupiah had a bigger decline Friday, although it has been stronger than other currencies in the past few weeks," Bank Indonesia (BI) governor Boediono said Friday. "Fundamentally, there is no problem."

Boediono said BI would keep monitoring fluctuations in the value of the rupiah, but declined to state an acceptable level for the rupiah against the dollar. "We will stay in the market to reduce the volatility (of the rupiah)."

Analysts said BI had been selling the dollar to intervene in the market, as seen in the fall in the country's foreign exchange reserves from US$60.56 billion in July to $58.36 billion last month.

"There was a decline in our foreign exchange reserves in August as we used the dollar to stabilize the rupiah," BI deputy governor Budi Mulya confirmed Thursday.

BI intervenes in currency markets by buying or selling on the foreign exchange.

Purbaya Yudhi Sadewa, Danareksa Research Institute chief researcher, said the rupiah's fall should be attributed not only to the strengthening dollar, but also to negative sentiments across global markets.

The world's top stock markets have been hit by massive drops, causing investors to panic and cut their assets holdings in risky emerging markets.

The Indonesia Composite Index dropped 2.5 percent to close at 2,022.56 on Friday – its lowest since Aug. 21, Bloomberg reported.

Purbaya said BI might have been seeking to protect the weakening rupiah against the dollar in its decision Thursday to raise its interest rate to 9.25 percent.

Fauzi Ichsan, Standard Chartered economist, said the central bank made the right decision in raising the rate, as the rupiah might have fallen further had it not done so.

"I believe the (rupiah's) decline will be short-lived," Fauzi said. "As soon as the global market is back to normal, the rupiah will follow suit."

Purbaya and Fauzi expect the rupiah to hover between Rp 9,200 and Rp 9,400 until the end of the year.