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.

The central bank, which is due to hold its next monetary policy meeting Aug. 20, said Thursday it was closely monitoring price developments in the market and would use "all available instruments to reduce the excessive volatility." It added that it would phase out liquidity facilities introduced during the pandemic, amid indications the economic recovery was gaining pace.

Boosting interest rates may deter foreign investors from unloading Turkish assets. Bond yields that are lower than inflation, 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.

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 11:30 ET (15:30 GMT)

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