Turkish Currency Collapses After Trump Doubles Metals Tariffs

Kenny Grant
August 11, 2018

President Donald Trump stepped up the pressure by doubling tariffs on Turkish metal imports, in the latest round of a dispute focused around the terrorism trial in Turkey of a USA evangelical pastor whose freedom Washington is demanding.

President Donald Trump said in a tweet Friday that he would hit Turkey with additional tariffs, as their national currency continues to drop.

The President threatened to levy harsh tariffs on Turkey last month, demanding the release of an American pastor now held by Erdogan's government.

Turkey is now under a 25 percent tariff on imported steel and 10 percent on aluminum, which went into effect in March.

The sudden announcement turned a run on the Turkish lira into a rout; it crashed more than 18 percent to a new record low against the dollar.

Investors piled into "safe" government debt, with German yields hitting three-week lows and the yield on the benchmark US 10-year Treasury note falling to 2.88822 percent.

The Turkish lira fell at least 13 percent Friday, as President Erdogan called for people to exchange their other forms of money to the lira.

"This is a national, domestic battle".

Erdogan added that Turkey was not afraid of "threats" and said it had many alternative sources of economic cooperation "from Iran, to Russian Federation, to China, and some European countries".

Turkey's financial crisis and further USA pressure spurred more concern among investors as fears appeared to spread to American markets.

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Turkey's ever combative President Recep Tayyip Erdogan vowed to not bow to economic pressure.

On March 1, Trump had announced global tariffs of 10 percent on all aluminum to the US and 25 percent on all steel imports.

The lira, which has lost more than 40 percent this year, hit a new record low after Trump took steps to punish Ankara in a wide-ranging dispute. He claims higher rates lead to higher inflation - the opposite of what standard economic theory says.

The recent sell-off in the lira has been fuelled by investor concerns over Erdogan's grip on monetary policy under a new powerful executive presidency and the ongoing row with the United States. But experts argue that the central bank should instead raise interest rates to ease inflation and to support the currency.

In modern economies, central banks are meant to be independent of governments to make sure they set policies that are best for the economy, not politicians.

Erdogan had raised eyebrows Thursday when he appeared to invoke divine intervention, saying: "If they have dollars, we have our people, we have our right and we have Allah!"

Treasury and Finance Minister Berat Albayrak - who is Erdogan's son-in-law - was scheduled later on Friday to outline a 'new economic model'.

There are now fears the weakening lira will see Turkish companies that borrowed heavily in the country's construction boom struggle to repay loans in dollars and euros. "Making a speech like Albayrak's in the midst of a currency free fall without a single concrete measure shows utter lack of comprehension about what's happening and what's required", tweeted Harvard economist Dani Rodrik. President Erdogan has pressured the central bank to maintain low interest rates by refraining from implementing much-needed hikes.

BBVA, which reported a lowly CET 1 ratio of 10.8 percent at the end of the first half, also said a 10 percent slump in the lira would shave 2 basis points off its core capital.

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