Turkish Lira Drops to Record as Central Bank’s Resolve Tested

  • Turkish currency also weakens to new record against the euro
  • Currency seen defenseless as central bank reluctant to act

Gallo: Euro Zone Break Up Risks Rising Next 6-12 Months

The Turkish lira’s losses deepened on Thursday, with the currency falling to record lows against the dollar and euro.

The lira dropped through 3.50 per dollar, extending its slump this year to 17 percent, the most in emerging markets behind the Argentine and Mexican pesos. The decline is adding to pressure on the nation’s central bank to step in to stem losses, even after its surprise interest-rate increase last week failed to have a meaningful impact on the lira’s drop.

“Turkey is at the moment the most exposed country to tail risks, both domestically and externally," said Cristian Maggio, head of emerging-market research at TD Securities in London, who cited a combination of weakening economic indicators and a “grave" political situation. “The market has the upper hand because it knows that the bank cannot defend the currency other than hiking," a move that has been opposed by politicians including President Recep Tayyip Erdogan.

The lira fell as much as 2 percent to 3.5063 per dollar on Thursday. It also fell to a record 3.7184 against the euro.

The lira has plummeted after Donald Trump’s victory sent U.S. yields soaring on speculation inflation will rise. Turkey’s economy relies on foreign cash to finance a current account deficit that is set to widen to almost 5 percent of output next year. The risk that higher oil prices after OPEC’s decision to cut output Wednesday will increase the country’s import bill is also piling pressure on the currency.

‘Fraught Situation

“It’s a terrible and fraught situation, but if the selloff continues at this pace, there will be absolutely no choice for the central bank except to intervene,” Phoenix Kalen, a strategist at Societe Generale SA in London said by e-mail, adding that the selloff today has been compounded by a lack of liquidity.

A host of domestic factors including a crackdown against Erdogan’s political opponents after a failed coup in July and the country’s involvement into the Syrian civil war has exacerbated investor concerns. Credit default swaps on the nation’s debt climbed 16 basis points to 306, the highest since February.

“If USDTRY goes high enough there will be no choice” for the central bank to raise interest rates, Henrik Gullberg, a London-based strategist at Nomura International Plc said by e-mail. “Where high enough is is what we are all finding out right now.”

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