Turkish lira sees another all-time low on Central Bank policy worries

ISTANBUL

REUTERS Photo

The Turkish Lira fell to another record low of 2.22 to the U.S. dollar on the last day of the week due to escalating concerns over the Central Bank’s unresponsiveness amid political tumult and Fed worries.

After starting the day near the record levels of 2.2125 it saw on Jan. 16, the Turkish currency broke another record, dropping below 2.221 against the dollar.

The currency also witnessed new levels of futility against the currency basket of the dollar and the euro, hitting 2.6202.

The crisis of the political establishment, which was shaken by dawn raids and arrests in mid-December that led to the resignation of three ministers and the dismissal of hundreds of police officers, has fueled investors’ worries about political stability in the country.

Fresh allegations that have emerged daily in local media and on social networks have added to political uncertainty and a feeling of unease in financial markets.

“We are seeing the most serious challenge for the government through their period of rule,” Gökçe Çelik, an analyst at Finansbank, told Reuters.

“As the accusations draw closer to the inner circle [of the ruling Justice and Development Party - AKP] they arouse more concerns regarding political stability, especially in the run-up to local elections in just over two months,” she said.

The lira was also affected after a Federal Reserve Bank gauge revealed that manufacturing in New York jumped to its highest level in 20 months in January, boosting the dollar.

The data suggested that U.S. economic recovery is not losing steam, supporting the case for a faster cut in U.S. bond buying.

Turkey is particularly vulnerable to reductions in U.S. stimulus because it depends on cheap capital inflows to finance its gaping current account deficit, running at 7 percent of gross domestic product.

Economists said they expected the Central Bank, which has so far avoided rate hikes for fear of denting growth, to leave its main interest rates on hold again at its monetary policy meeting Jan. 21.

The bank has been tightening policy by canceling its repo auctions, which fund the market at 4.5 percent, lower than the average cost of funding for banks at over 7 percent.

It has also tried to shore up the lira with dollar sales, with a minimum of $3 billion to be auctioned in January