The Turkish lira fell to a new high of 8.6 against the dollar on Friday amid fears of global inflation, expectations that the central bank will cut rates soon and concerns about possible early elections .
The currency – by far the worst performing emerging markets (EM) this year – weakened beyond the intraday low of 8.58 it hit in November. It recovered some losses and was at 8.562 against the US dollar at 8:34 a.m. GMT.
It also recorded a new nadir of 10.4696 against the euro.
The lira has fallen 16% since mid-March, when President Tayyip Erdogan abruptly sacked a hawkish, market-friendly central bank chief and replaced him with Sahap Kavcioglu, who had criticized recent rate hikes.
Although Turkish inflation exceeded 17% in April, the bank is expected to cut its key rate by 19% in the coming months.
But as the world emerges from the pandemic, global inflation has risen and is pushing up U.S. bond yields. This in turn is pulling funds from emerging markets such as Turkey, hitting the lira and putting upward pressure on domestic prices due to its heavy imports.
“The earlier than expected (monetary) tightening in advanced economies is the most serious risk for Turkey, as inflationary pressures increase across the world,” said Hakan Kara, former chief economist at the central bank who is now at Bilkent University.
“If there was a rapid reduction (in asset purchases by the US Federal Reserve), it would not be good news for emerging economies, especially for those facing external weaknesses,” he said. said Thursday during a World Bank panel.
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The lira has lost more than half of its value over the past three years as Erdogan ousted three central bank governors and his government used unorthodox policies that analysts say have made the economy stronger. vulnerable to crises. Read more
Foreign exchange reserves have plunged over the past two years as state banks sold around $ 128 billion to stabilize the lira, leaving Turkey potentially vulnerable if businesses and banks struggle to pay off. of their high external debt obligations.
Naci Agbal, who predated Kavcioglu at the central bank, served less than five months as governor and was appointed a day after the lira hit its last record low in November.
Agbal’s aggressive rate hikes attracted foreign investors and briefly turned the tide for the currency.
But Commerzbank analyst Tatha Ghose said Erdogan’s public opposition to high rates and his swift leadership reshuffles damaged the central bank’s credibility and led to a “familiar spiral of reading.”
“Each burst of depreciation risks triggering a new lira crisis as it begins to spill over into higher inflation, which the central bank cannot fight because it is unable to credibly raise rates,” he said. it declared in a customer note.
Later Friday, S&P Global is expected to review Turkey’s B + rating. Debt swap markets, sometimes a leading indicator of movement, are currently pricing Turkey two notches below S&P’s current rating, in line with B-rated countries.
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