Markets

How far will the lira fall?

A.In early November, the Turkish President said his country was in an “economic war” against a “devil’s triangle” made up of interest rates, exchange rates and inflation. A week later, Recep Tayyip Erdogan lost another battle in the “economic war”. After the lira to euro rate had tested the 10 mark for several days, it broke through the rate on Friday sustained to rates of 10.13 lira to euro.

The dollar cost 8.34 lira and remained at its weakest level ever. The most recent phase of weakness in the Turkish national currency has now lasted three months. But the Turkish government continues to reject a significant rate hike to stabilize the currency, as this would weaken the country’s economic upturn.

Homemade reasons for currency decline

Finance Minister Berat Albayrak instead blamed uncertainties surrounding the presidential election in America and the corona pandemic for the currency crisis. These would have boosted the dollar exchange rate. In fact, a possible election victory for Joe Biden is seen as a hindrance to the improvement of the already tense Turkish-American relations. On the other hand, many emerging market currencies had recently appreciated against the dollar.

Against the lira, the dollar and euro rose by almost 50 and 60 percent respectively over the course of the year, more so than against other emerging market currencies. That is why analysts do not accept the argument that the pandemic is to blame for the currency collapse. Rather, they point to home-made reasons such as the weakness of the central bank and incalculable political interventions – not least the ongoing new disputes with the EU, which is the most important sales market for Turkish products.

With his remarks, Albayrak gave the lira “another potential nail in the coffin”, judged Tatha Ghose from Commerzbank. His resistance to central bank policy had also dashed hopes of a possible change in interest rate policy to combat the inflation rate of just under 12 percent.

Goldman Sachs, meanwhile, estimated that Turkey has spent $ 101 billion so far this year to prop up its currency. According to data from the central bank, net reserves have shrunk by a good $ 2 billion to just under $ 19 billion, while Turkish citizens’ foreign currency and gold holdings have risen to a record high of $ 221 billion.

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