The rupiah strengthened to its highest level in a year on Tuesday, as the country's strong economic prospects and comparatively high interest rates boosted foreign investment.

It rose 1.2 percent to 9,437 to the US dollar as of the stock market's close and briefly touched 9,428, the highest level since Oct. 3, 2008, at the onset of the economic crisis, said Bloomberg. The rupiah has risen 15.5 percent this year, making it the best performer among Asia's 10 most-traded currencies.

Johanna Chua, a Singapore-based Citigroup economist, said Indonesia's strong economic fundamentals, including attractive interest rates and improved credit rating, were behind the rally.

On Monday, Bank Indonesia's held its key interest rate steady at 6.5 percent, the highest among Asia's 10 largest economies. The bank also raised its 2009 growth forecast to between 4 percent and 4.5 percent, from 3.5 percent to 4 percent, saying a global recovery would help the country's exports rebound.

Budi Mulya, a central bank deputy governor, has said that an upgrade in the country's sovereign risk rating by Moody's Investor Service in September had also helped increase capital inflows.

However, Helmi Arman, an economist at PT Bank Danamon, warned that much of the foreign investment was short-term and could easily be reversed by another downturn in the global economy, creating volatility in the domestic stock market and the rupiah.

"It's important to note that the rupiah's strengthening over the past month appears to have been spurred substantially by portfolio capital inflows," he said. "We think this could mean that the local currency's appreciation may be accompanied by an increase in potential volatility."

A stronger currency directly benefits importers but lowers returns for exporters. However, neither exporters nor importers like high currency volatility because of the uncertainty it brings to their earnings.