Lira Slides to Record Amid Bets Election May Weaken AKP Majority

The lira fell to a record and Turkish bonds and stocks declined as speculation June elections may diminish the AK Party’s majority added to selling pressure driven by the prospect for higher U.S. interest rates.

The currency lost as much as 1.1 percent to 2.6573 per dollar, bringing this year’s rout to 12 percent, the third-worst performer among 24 emerging-market peers tracked by Bloomberg. Opinion polls in the past three weeks have shown waning support for the AK Party, from which President Recep Tayyip Erdogan hails. Yields on two-year government notes climbed for a fifth day to a four-week high of 8.89 percent, while the Borsa Istanbul 100 Index lost 0.9 percent.

Currency weakness reflects concern over Turkey’s “longer-term policy orientation,” Timothy Ash, the chief emerging-markets economist at Standard Bank Group Plc, said in an e-mailed note. “Opinion polls suggest a tricky election for the ruling AKP.”

The AKP’s three-term limit will bar Deputy Prime Minister Ali Babacan, viewed by some as integral to the country’s economic management, from running for parliament. This is contributing to selling pressure as prospects for the Federal Reserve to start raising interest rates for the first time since 2006 damped demand for emerging-market currencies this year, leaving the lira vulnerable to outflows.

One opinion poll showed the main Kurdish party, the People’s Democratic Party, poised to attain the 10 percent vote it needs to enter parliament. The AK Party has managed a single-party government for 13 years.

Policy Choices

The lira dropped 1 percent to 2.6560 per dollar by 6:28 p.m. in Istanbul. Investors are awaiting for the outcome of elections as Erdogan lobbies for a big enough majority to enable him to alter the constitution to boost the powers of the president’s office.

“The lira has been under-performing with political uncertainty approaching elections,” Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi in Istanbul, said by e-mail. The drop on Monday was mainly due to the stronger dollar, he said.

Pressure from politicians, including Erdogan, for the central bank to deepen interest-rate cuts helped drive Turkish assets lower this year. The rhetoric eased after central bank Governor Erdem Basci told the president last month that reductions in borrowing costs need to follow inflation.

Still, the perception of interference may limit Basci’s options and leave the lira more susceptible to shocks and amplify exchange-rate volatility, Ahmet Akarli, an economist at Goldman Sachs Group Inc. in London, said in an e-mailed report.

“There will be more clarity on this key point after the fast approaching June 2015 general elections, as much will depend on the policy choices of the new government and its leadership,” Akarli said.

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