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The rupiah rose to its strongest level in almost three weeks on Monday on speculation that near-zero interest rates in the United States would continue to fuel demand for higher-yielding assets, helping the Indonesian economy and capital markets attract funds.

The currency gained 0.3 percent to 9,414 per dollar as of the stock market’s close on Monday, compared with 9,447 on Friday.

The International Monetary Fund signaled over the weekend that record-low US interest rates were being used to fund “carry trades,” and the dollar is still overvalued.

The Federal Reserve repeated last week that it would keep borrowing costs near zero for “an extended period.” Analysts have forecast that Bank Indonesia would raise its benchmark rate of 6.5 percent in the second quarter of 2010.

“Yield differentials are definitely supportive of the rupiah but so is risk appetite,” said Prakriti Sofat, a regional economist at Barclays in Singapore. “We have to remember, too, that Indonesia’s economic growth story is one of the strongest in the region.”

The rupiah has gained 16 percent this year, nearly twice as much as the South Korean won, the second-best performer among Asia’s 10 most-traded currencies.

“The economic fundamentals – accelerating GDP growth, strong external fundamentals, rising foreign exchange reserves – and the stable political environment remain the main positives for the rupiah,” Prakash Sakpal, an economist at ING Singapore, told the Jakarta Globe on Monday.

However, he said ING viewed inflation as the main risk to the currency. He said inflation would eventually restrain a further appreciation of the rupiah, causing it to weaken by 4 percent in the next few months. Most of the inflation would come from rising commodity prices — for oil, coal and metals — which were all expected to increase further next year, he said.

“We see inflation heading to 7 percent by mid-2010, from 2.6 percent in September, as the final leg of the boom-bust-boom in commodity prices of the last 18 months works its way through the consumer price index,” Sakpal said.

“This underlines our forecast that the US dollar-rupiah cross rate will hover over 9800 over the next three months. We expect the currencies to be at around 9500 by the second half of 2010, when we expect inflationary pressure to start to ease.”

PT Bank Danamon economist Anton Hendranata said inflation was expected to increase through the end of the year, especially during the Christmas and the New Year celebrations.

“The speedy rebound of the rupiah against the dollar poses a high risk of reversal, leading to a level that reflects the economic fundamentals,” he said.

Anton said he expected the rupiah to trade at 9,600 against the dollar at the end of the year, as the dollar improved along with the US economy.