Why Turkey’s currency is plunging and what it means

Kenny Grant
August 11, 2018

This is just another threat that traders need to factor in, when you consider that the markets are already overwhelmed with prolonged tension around the global trade war narrative, and the unpredictable nature of the Trump Administration that has seen a threat of sanctions on Turkey, new sanctions imposed on Russian Federation and re-imposed sanctions on Iran in just over one week.

Trump said via a tweet that the tariff on aluminium imports will be increased to 20 per cent and the tariff on steel imports will be raised to 50 per cent as the Turkish Lira "slides rapidly downward against our very strong Dollar!" Trump said in an early Friday morning post on Twitter.

Turkey's imports from the USA were worth $1.3 billion in 2017, the ministry added. It followed a deepening rift with the United States, worries about its own economy and lack of action from policymakers.

On Friday, Trump announced that the U.S. will impose a 20 percent duty on aluminum and 50 percent one on steels as tensions mount between the two North Atlantic Treaty Organisation allies over Ankara's imprisonment of United States pastor Andrew Brunson.

In a televised speech on Friday, Turkish President Recep Tayyip Erdogan called on citizens to exchange foreign currency and gold for lira, calling it an "economic war".

"If there is anyone who has dollars or gold under their pillows, they should go exchange it for liras at our banks", he said during an address to supporters.

Emerging market currencies are ending the week with a brutal sea of red across the board, with consistent losses throughout Asia, while the South African rand and Turkish lira are leading the way with losses within the EMEA.

Turkish President Tayyip Erdogan leaves from a mosque in Bayburt, Friday.

Reverberations spread through global markets, with European stockmarkets especially hit as investors took fright over banks' exposure to Turkey.

Brunson, a USA citizen and Turkish resident for over two decades, was arrested in Turkey on charges of terrorism and espionage. Turkish officials held talks in Washington this week but there was no breakthrough.

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The dollar rose as exposure to Turkey could impact European banks and spark a domino effect throughout Europe as people begin to pull out of those banks and into the USA, said Gregan Anderson, macroeconomic strategist at brokerage Bulltick LLC.

"I would say we would define progress as Pastor Brunson being brought home", Nauert said.

Turkey's embattled lira on Friday hit new record lows against the U.S. dollar and euro, losing over seven percent in value as strains with the United States showed no sign of abating and fears grew over the exposure of European banks.

Turkey has arrested an American pastor and put him on trial for espionage and terror-related charges linked to a failed coup attempt in the country two years ago.

Erdogan, a self-described "enemy of interest rates", wants cheap credit to fuel growth, but investors fear the economy is overheating. "Don't heed them", Erdogan said (via CNBC).

Independent analysts argue the central bank should instead raise rates to tame inflation and support the currency.

Erdogan and his newly appointed finance minister, Berat Albayrak, are due to speak at 2 p.m. local time Friday.

The lira has fallen about 40 percent against the dollar this year.

"This is a national, domestic battle". Hard currency debt issued by Turkish banks suffered similar falls.

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