Dadan Wijaksana, Rendi A. Witular, Jakarta – While sentiment remains in favor of the dollar, the rupiah is expected to regain some ground against the dollar this week on expectations that Bank Indonesia will be prepared to intervene to prevent the local unit from falling further.

Bank Indonesia will be more determined to protect the rupiah, which had lost 2 percent of its value during last week's trading, amid strong criticism of the central bank for not taking action, according to BNI analyst Ryan Kiryanto.

"Because of this criticism, BI will go all-out to defend the rupiah, with massive intervention if necessary," Ryan told The Jakarta Post, adding that the rupiah could strengthen to 8,900 per dollar this week.

The local currency fell to a 14-month low of Rp 9,040 per dollar on Friday, compared to 8,735 the previous week.

As well as being dragged down by the yen's sharp drop against the US greenback – which saw the Japanese unit falling to 114.65 Yen from 110.60 Yen the week before, the rupiah's recent slump was also attributed to speculation.

Most currencies fell against the dollar last week amid expectations that the U.S. Federal Reserve would increase its interest rate soon, which should make investment in dollar-denominated assets more attractive.

Under criticism for failing to stop the rupiah's fall, the central bank accused four foreign banks of being too actively involved in foreign exchange transactions. It even sent a warning letter to them and placed supervisors in the dealing rooms of the banks so as to monitor their foreign exchange transactions.

In another bid to help curb speculation against the rupiah, the central bank said it was considering tightening up a ruling on foreign exchange transactions. According to the current ruling, a bank can only engage in forex trading that is unconnected with underlying transactions to a value of up to 20 percent of its equity capital.

This is stipulated in the central bank ruling on net open positions (NOP) – which regulates the extent to which a bank can go short or long on foreign currencies against the rupiah. Such a move, Ryan added, should help discourage foreign banks, and other banks, from engaging in speculation.

Other analysts, however, were not so optimistic. Market analyst Dandossi Matram expressed doubts over the weekend that Bank Indonesia's measures would be effective in minimizing speculative transactions.

"Under the current policy, where the rupiah is freely floated in accordance with market demand, the rupiah will remain vulnerable to speculation. And also, [under the current system] one cannot be punished for engaging in foreign exchange transactions," Dandossi added.

A dealer with a joint venture bank also said that the pressure on the rupiah would not abate this week given the dollar's continued strength. "The main factor is the sentiment. At present, investors just see that it is more beneficial to hold dollars than rupiah," he said, adding that the market's concerns about the upcoming presidential elections had not fully subsided.