Turkish Lira Continues Plummet, Reaches Record Low

Published on: 08/23/18 8:42 AM

Category: Uncategorised

Following a disastrous drop associated with the doubling of steel and aluminum tariffs by the Trump administration on Friday, Turkey’s lira continued its free fall over the weekend. The nation’s currency hit a new low on Sunday evening, but was eventually stabilized by the announcement of new measures from Turkey’s central bank.

The lira dropped to its new record low of 7.24 to the dollar on Sunday evening, a fact that reflected broad uncertainty about the Turkish economy. The selloff of the lira coincided with increased overall demand for currencies considered to be stable and safe by comparison, such as the USD and CHF. Stepping in to buoy the market, however, the Turkish central bank announced on Monday that it would guarantee liquidity in liras for the banking sector in Turkey. Though the move did stabilize the lira and prevent further selloffs, it did relatively little to undo the damage to the currency’s value on the open market.

Two different versions of the lira’s plunge have emerged as the Turkish government attempts to hold complete currency collapse at bay. Economists and analysts attribute the currency’s rapid decrease in value to structural problems within the Turkish economy itself, not the least of which is President Recep Tayyip Erdogan’s personal involvement in economic and central bank policy. Erdogan, however, has portrayed Turkey as a victim of an economic attack by the United States.

At the center of the dispute is the country’s central bank, which has long refused to increase interest rates as the economy improves. The result of this policy has been a high rate of inflation, though one that is not unprecedented in Turkish economic history. Combined with increased tariffs on Turkish metals and a growing concern about President Erdogan’s heavy-handed role in the economy, however, this policy has set the stage for the recent severe selloffs of the lira.

To fully repair the damage done to its currency strength over the past several days, analysts believe that Turkey will need to adjust more than just its monetary policy. While interest rate hikes at the central bank represent a likely starting point, investors are seeking assurances that the bank itself can operate independently of Mr. Erdogan’s political influence.

Erdogan is also believed to be seeking a new source of outside capital with which to stimulate the Turkish economy, a move that could potentially bolster the lira and reverse some of its recent losses. A conversation between Erdogan and President Vladimir Putin of Russia on Friday touched on the possibility of greater economic ties between the two nations. With its history of investment in emerging markets, China is also a potential candidate for such an outside injection of capital. Though Turkey may be eligible for a bailout by the International Monetary Fund, experts believe that Erdogan will attempt to avoid the IMF in order to prevent austerity measures from being implemented in his country.