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Nerves taut as Turkish Lira slides

Author: Bharath Sunnam/Wednesday, August 15, 2018/Categories: Currency

Nerves taut as Turkish Lira slides

The Turkish Lira’s recent freefall that eroded more than three quarters of its value in 2018 against the US dollar has sent tremors through other emerging currencies which fear a trickle-down effect.

The USD-TRY (Dollar-Lira) pair made a high of 6.7776 on Monday, following the announcement by US President Donald Trump to double the tariffs on steel and aluminum from Turkey amidst a diplomatic rift.

However, the trade sanction by the US may not be the only reason leading to the fall of the Lira. Turkey’s domestic economic prospects have worsened with inflation rising to 15.85 per cent in July, government borrowing in foreign currencies inching up and current account deficit reigning at high levels. Meanwhile, the Central Bank of Turkey (TCMB) took no steps to arrest the fall of the Lira as Turkey’s President President Recep Tayyip Erdoğan openly resisted interest rate hike to defend the currency.

Investors has earlier raised concerns over the President appointing his son-in-law Berat Albayrak as the finance minister as it would further dent the independence of the Central Bank. Erdogan is also a proponent of cheap credit from banks that would fuel growth.

Worried about contagion effects on large European banks with exposure to Turkish assets, investors across the globe rushed for shelter. Following this, Turkish treasury minister Albayrak said the government had prepared an action plan to support the Lira and would start implementing it from this week. As the central bank also pledged to support to provide required liquidity to ensure financial stability, the Lira pulled back, soothing nerves after a tumultuous session.  

However, the clouds of recession continue to hover over Turkey which would cast its gloom on the investor sentiment, supporting the dollar and pushing the emerging economies currencies lower.

The author is fundamental research analyst at Karvy Forex and Currencies Private Limited

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