Jakarta – Indonesia's beleaguered rupiah broke through the key target of 10,000 to the dollar on Wednesday, reaching its strongest levels since former President Suharto resigned in May amid economic turmoil and mass unrest.

A recovery to 10,000 in the fourth quarter of 1998 was a crucial assumption of reform plans agreed with the International Monetary Fund in June in return for a multi-billion-dollar bailout of Indonesia's stricken economy.

Many analysts scoffed at the time, but buoyed by hefty infusions of foreign aid and loans, talk of the imposition of Malaysia-style currency controls and glimmers of hope that inflation might be slowing, the currency has proved them wrong. Dealers said it traded as high as 9,700 to the dollar on Wednesday, gathering steam after breaking the resistance levels of 10,600 to the dollar on Tuesday and 10,000 on Wednesday. "It gained very quickly once it broke through the psychological barriers of 10,600 yesterday and 10,000 today," said a dealer at a foreign bank. "It is also being helped by regional currencies gaining against the dollar. I can see it making more gains."

Indonesia's IMF-approved budget and reform programme assume an average rupiah rate of 10,600 in the fiscal year to end-March. The currency has sunk as low as 17,000 amid the political, economic and social chaos of recent months. Tuesday's highs were the rupiah's firmest levels since May 13 – the day riots exploded in Jakarta after four student protesters were shot dead. The rioting left almost 1,200 people dead and added to the pressure that toppled Suharto, who quit on May 21.

Dealers said the rupiah could see some profit taking at present levels but it still had room to make further gains. "At the range of 9,700 to 9,800 some people are likely to be buying dollars again," said a dealer at a European bank in Jakarta. "But the trend is still there, a close of 9,500 or 9,600 today is still in the picture." In spite of its recent strength, the rupiah is still down 75 percent from its pre-crisis levels of July 1997 of around 2,450 to the dollar and is not yet strong enough to solve the crushing debt burden that has crippled the corporate sector.

Mohammad Syahrial, head of research at Jakarta's Pentasena Securities, said that even at a rupiah rate of 8,000 to the dollar, 260 of the 282 firms on Jakarta's stock market would still be technically bankrupt. The rupiah has staged a gradual recovery since July, fuelled by billions of dollars in loans and aid pledged by international donors to keep the economy afloat. As Indonesia converts the dollars into rupiah, the local currency has steadily risen.

Some analysts have cautioned that the boost to the rupiah provided by foreign aid is temporary, and that if the aid dries up, the rupiah will weaken once more. But dealers say other factors were also lifting the rupiah, including favourable inflation figures for September and fresh talk the country will introduce Malaysia-style currency controls. An article in Tuesday's Bisnis Indonesia daily quoted an unnamed banking industry source as saying the government might stop overseas trade in the rupiah.

The article moved the market, despite the government's repeated denials in recent weeks that it planned to restrict trade in the currency. Dealers also said the rupiah was benefiting from signs social unrest was on the wane – although this could quickly be reversed if violence flared again, particularly if it affected Jakarta. The rupiah's recovery slowed last month because of an upsurge in unrest and anti-government protests, fuelled by the spiralling costs of food, particularly rice. "The political situation is not looking so bleak as it was a few weeks ago," a dealer said. "But it is extremely fragile. The problem we still face is that all the progress we have made could still be reversed in a matter of hours."