Turkey’s lira fell the most of any currency worldwide and stocks slid after the nation’s deadliest bombing attack in two years fanned concern violence will escalate and speculation grew the ruling party will fail to form a coalition.
Turkey’s currency and its equity benchmark posted their biggest declines in three weeks after a bombing at a cultural center in Suruc near Turkey’s border with Syria killed at least 28 people. The bomb struck a group of young activists preparing to cross the Syrian border to reach the Kurdish stronghold of Kobani, devastated during months of fighting last year with Islamic State.
“The real driver separating lira performance from emerging-market foreign exchange today is the explosion,” Pinar Uslu, a strategist at ING Bank in Istanbul, said by e-mail. “The situation in Syria and regional instability is already seen as a factor increasing Turkey-related risk.”
The lira slid 1.5 percent 2.6931 against the dollar at 6:36 p.m. in Istanbul, trimming gains from the weakest on record on June 8 to 4.3 percent. The Borsa Istanbul 100 Index dropped 1.8 percent, biggest drop after Argentina among 93 gauges tracked by Bloomberg.
“Today’s terror attack is of key concern,” Phoenix Kalen, director of emerging market strategy at Societe Generale SA in London, said by e-mail. “It heightens worries regarding the potential for Turkey to be drawn militarily into the conflict in Syria. It also underlines the vulnerability of regional politics surrounding Turkey.”
There was no immediate claim of responsibility for what the Interior Ministry called a terrorist attack that left more than 100 others wounded.
“Any major provocation against Turkey risks bringing it more forcefully into the war,” said Aaron Stein, a non-resident fellow at the Atlantic Council’s Rafik Hariri Center for the Middle East.
Turkey’s currency fell earlier on speculation the government may be forced to call an early election. Prime Minister Ahmet Davutoglu told his party’s provincial chiefs that while efforts to form a coalition will continue, they should be on alert for early elections, a person familiar with the matter said. Davutoglu has until mid-August to form a coalition, a minority government or face a new poll after his AK Party losts its majority at a June 7 election.
As the deadline approaches without a resolution, investors will become more unsettled, according to Cristian Maggio, head of emerging market research at Toronto Dominion Bank in London, says by e-mail.
Prospects for another election and the country’s reliance on foreign capital to finance its current-account deficit as the U.S. moves closer to raising interest rates led Morgan Stanley to predict the lira will fall a further 5.5 percent to 2.85 versus the dollar.
“Investors are biased to be short lira,” Koon Chow, a senior macro and foreign-exchange strategist at Union Bancaire Privee in London, said by e-mail. “The tragic bombing and people’s uncertainty about what this means for Turkey’s actions in Syria and ISIL has triggered the additional weakness.”