Lira Plunge a Reminder That Fed Isn't Only Emerging Market Risk

  • Turkish currency was already under pressure in wake of Fed
  • Yield from Turkish assets remains in demand from global money

Lira's Plunge And Its EM Contagion Risk

Emerging-market investors were handed a timely reminder that political risk is never very far away.

The lira briefly tumbled to a record low on Monday morning against a basket of currencies including the euro and the dollar as tensions between Turkey and the U.S. escalated. It’s the last thing the country needs -- with widening twin deficits in Turkey already dampening sentiment together with concern many emerging-market assets will be weakened in a climate of higher U.S. interest rates.

Investors this year have already had to cope with President Recep Tayyip Erdogan’s state of emergency and the nation’s companies continue to grapple with vast financing needs. Its propensity to flourish in adversity has meant expectations for economic growth remain high. And the yield-hunting global wave of money means that appetite for lira-denominated assets has remained strong and may continue to be so if this latest political spat can be cooled quickly.

Remember, its stock market, which is already up more than 30 percent this year, trades at the cheapest level relative to its peers in developing nations since 2009.

The Turkish lira dropped to as low as 3.8533 per dollar and traded 3.1 percent lower at 3.7263 as of 8:18 a.m. in Singapore.

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