Turkish Lira Hits Record Low, Spurring Expectations of Rate Rise -- Update
August 06 2020 - 11:22AM
Dow Jones News
By Caitlin Ostroff
The Turkish lira hit a record low against the dollar despite
efforts by the country's central bank to curtail its fall.
It fell 3% Thursday, its biggest daily decline since March 2019,
erasing 18% of its value for this year. At the currency's weakest,
one dollar bought 7.3021 lira, putting it on track for its
lowest-ever closing value. The previous intraday record low was one
dollar buying 7.2692 lira, hit May 7.
Turkey has spent billions of dollars keeping the lira from
falling after emerging-market currencies came under pressure in
March, with investors pulling out of riskier markets as economies
closed to contain the spread of coronavirus.
Some countries, including Brazil and Mexico, let their
currencies weaken. But Turkey's central bank borrowed more foreign
currencies from domestic banks than it has in its coffers, selling
those into the market and buying the lira. Goldman Sachs estimated
that the country had spent $65 billion this year managing its
currency by the end of June.
"Clearly, the foreign-exchange intervention has failed. They are
looking to conserve reserves," said Timothy Ash, senior sovereign
strategist covering emerging markets at BlueBay Asset Management.
"They're looking to see where the currency goes and where it
stabilizes."
Turkey has tried to avoid a weaker lira due to concerns that it
will drive up the cost of imports and stoke inflation, which stood
at 11.76% year-over-year in July. Demand for imports has risen
lately as President Recep Tayyip Erdo an's administration sought to
offer cheap credit to homes and businesses to restart the economic
recovery.
The increased demand for imports comes as the country is earning
less dollars and euros because of waning tourism and a slump in
exports. That has increased the funding gap between imports and
exports, widening the current-account deficit and exacerbating the
need for foreign currencies.
If the lira continues to drop, Turkey may be forced to raise
interest rates again, Mr. Ash said.
He isn't alone in his projection. Analysts increasingly expect
Turkey's central bank, which cut rates to 8.25% by May from 12% at
the end of last year, will be forced to reverse course. Goldman
Sachs expects rates will be hiked to 10% by the end of the year,
and 14% by the end of 2021.
Boosting interest rates may deter foreign investors from
offloading Turkish assets. Bond yields that are below inflation
levels, combined with Turkey's efforts to bolster its currency,
have prompted foreign investors to withdraw more than $4 billion
from Turkish equities since the start of the year. They have also
pulled out $7 billion from lira-denominated bonds.
Investors' diminishing appetite sent the yield on a Turkish
five-year dollar-denominated bond up to 7.01% by Wednesday, from
about 4.71% when it was issued in February.
That sent the interest rate linked to borrowing Turkish lira in
exchange for dollars in offshore markets as high as 1,000% Tuesday
in annualized terms, according to analysts and investors, in yet
another sign of how the currency's market has become
dysfunctional.
The fair value for the currency is about 7.5 lira to a dollar,
based on estimates of Turkey's financing needs from its current
account balance, according to the Institute for International
Finance.
Elsewhere in currency markets, the ICE US Dollar Index, which
measures the greenback against a basket of currencies, fell 0.1%
Thursday. In bond markets, the yield on 10-year U.S. Treasurys slid
to 0.518%, from 0.541% Wednesday.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
August 06, 2020 11:07 ET (15:07 GMT)
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