Turkish lira tumbles to weakest point since December 2021

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The Turkish lira weakened to 17.579 against the dollar on Tuesday, as the strong US unit and concerns over high domestic inflation and low interest rates dragged the currency to its weakest level since a full-blown currency crisis in December.

Since the historic crash last year, the central bank has used its foreign exchange reserves to stabilise the lira, which is still down about 25 percent on the year after shedding 44 percent in 2021 to become the worst performer among emerging markets (EM).

Unorthodox rate cuts late last year sparked the crisis that sent inflation soaring to nearly 80 percent in June.

“A lot of investors are fed up with Turkey because this is a country that is pursuing the polar opposite of what needs to be done in terms of macroeconomic policy,” said Nafez Zouk, EM sovereign debt analyst at Aviva Investors.

In recent months since the crisis, the government and central bank have ramped up measures to reverse the tumbling foreign-exchange rate, including placing restrictions on lending to firms with more than $1 million in foreign currency cash and implementing a state-backed FX-protected deposit scheme.

“Turkey has had high inflation and external imbalances, but we’re now adding to the mix potential fiscal weakness due to the FX deposit scheme – policies have been trying to buy time, hoping things normalize, tourism returns and FX stabilizes, but it was a combination of bad skill and bad luck,” Zouk added.

On Thursday, Turkey’s central bank is set to hold a monetary policy meeting where it likely to hold its benchmark interest rate at 14 percent for a sixth straight meeting, a Reuters poll showed, despite a global tightening cycle and annual inflation at a 24-year-high.

“Currency interventions were seen stopping the lira’s fall near 17.35 per dollar in June and early July,” said Alex Kuptsikevich, senior market analyst at FxPro.

“But with running inflation, meagre foreign reserves at the central bank, and high prices for agricultural products and raw materials, any attempt to stop the lira from weakening has only served to irritate market participants,” he added.

Following last month’s correction, market bears are unlikely to retreat until the lira reaches record levels near 18.30 per dollar, Kuptsikevich added.

“Turkey is facing even higher inflationary pressures than last year, as it heavily depends on imports of energy, metals, and agricultural products. The renewal of record lira lows is a question of when, not if.”

Inflation is expected to ease somewhat to around 70 percent by year-end, a separate Reuters poll showed.

More broadly, emerging markets have been under pressure as investors flee to safe-haven assets and as a combination of Russia’s invasion of Ukraine, China’s economic strains and rising recession fears lead to historic outflows from EM.