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 2.5% Thursday, its biggest daily decline since March
2019, erasing 17.7% of its value for this year. At the currency's
weakest, one dollar bought 7.3101 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
currency from domestic banks than it has in its coffers, selling
that into the market and buying the lira. Goldman Sachs estimated
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
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
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 raised 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.
Signaling a possible shift in policy, officials from the central
bank and the Turkish banking watchdog held an hourslong meeting
with top executives from the country's main banks late Thursday
evening to discuss recent market developments, according to people
familiar with the matter. No announcement was issued after the
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.
In an effort to stem the lira's slide, authorities have made it
more difficult for domestic lenders to provide lira to foreign
banks. Limiting access to the lira makes it harder for foreign
investors to bet the currency will weaken.
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
On Thursday, the banking regulator partially eased access to the
lira for foreign banks, so long as transactions are to buy
lira-denominated assets or deposit lira in local banks.
The reduced access to the lira could put Turkish assets under
pressure in other parts of the market as well. The cost of insuring
against default on $10,000 of five-year Turkish dollar-denominated
bonds using derivatives contracts called credit default swaps
climbed to $589 a year Thursday, from $238 a year in February.
Investors buy these swaps if they think the price for insuring
against a default will rise further.
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 U.S. currency against a basket of others, fell 0.2%
Thursday. In bond markets, the yield on 10-year U.S. Treasurys slid
to 0.523%, from 0.541% Wednesday.
David Gauthier-Villars contributed to this article.
Write to Caitlin Ostroff at firstname.lastname@example.org
(END) Dow Jones Newswires
August 06, 2020 16:47 ET (20:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.