Turkish lira weakens beyond 2 per dollar on Washington’s Syria comments

ISTANBUL- Reuters

Turkey’s Central Bank has been tightening monetary conditions to support the lira through a range of tools. REUTERS Photo

The Turkish lira weakened beyond 2 to the dollar this morning after the United States signaled possible military intervention in Syria and the market waited for Central Bank action to halt the currency’s fall.
The lira was at 2.0051 against the dollar by 10:10 a.m. after dropping as low as 2.0095 earlier and from 1.9918 late on yesterday.

Turkish Central Bank governor Erdem Başçı was expected to appear on television at 10.30 a.m., and investors are looking for more guidance on how he will act to stop the lira’s decline.

Turkey’s Central Bank has been tightening monetary conditions to support the lira through a range of tools, but has left its main benchmark rate - the one-week repo rate - unchanged at 4.5 percent.

The stock markets have begun the day on concerns as well. As the drop in main share index, BIST 100, has approached 2 percent, falling below 68,000 points.

“The recent developments in Syria signal possible military intervention and this is negative for economies like Turkey,” said Fatih Keresteci, a strategist at HSBC Bank in Turkey.

“The Turkish Central Bank’s hyperactive monetary policy, which aims to reduce the selling pressure, creates a second wave of selling tendency because it creates uncertainties. The lira will remain under pressure unless the central bank switches to an orthodox policy and makes lira relatively attractive again.”

The central bank held a forex auction yesterday and sold $350 million, in line with additional monetary tightening steps announced last week. The bank also held its first one-week, fixed-rate repo auction in almost a week, with a volume of 1.5 billion lira ($755 million).

It also said it would launch a forex-selling auction on Tuesday with a minimum volume of $50 million.
Growing expectations that the U.S. Federal Reserve may soon start tapering its stimulus programme has hit appetite for emerging markets, with Turkey’s gaping current account deficit leaving it particularly vulnerable.

The country is dependent on foreign inflows to finance the gap, which is equivalent to around 7.1 percent of Turkey’s economic output.

Raising interest rates makes lira assets more attractive to foreign investors, but could also crimp growth, something Prime Minister Tayyip Erdoğan’s government is eager to avoid before local polls next year and a general election in 2015.