Turkish lira hits new low on worries over economy, U.S. row

Irving Hamilton
August 10, 2018

The Turkish lira has fallen to a new record-low this morning, as much as 12 per cent in one day, amid the souring of diplomatic relations with the United States and a deepening monetary policy crisis.

"The markets now fear that sanctions could be imposed on Turkish banks".

The currency is now down more than 36 percent this year, and 17 percent this month alone, fanning worries about a full-blown economic crisis.

Today's declines have dragged down European shocks, with the Stoxx Europe 600 falling three per cent on its exposure to banks and miners. "It looks like EUR/USD will hit our end-September forecast of 1.1400 early", says Richard Grace, a foreign exchange strategist with Commonwealth Bank Australia.

"GBP stabilised somewhat yesterday and EUR/GBP fell back to just below the 0.90 level".

Analysts said Turkey's lira and the Russian rouble were hit hardest in the sell-off. Raising the rates has been heavily opposed by Erdogan. Wall Street was set for a weak open.

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The Turkish delegation met with the State Department's No. 2 official, John Sullivan, on Wednesday to address friction between the North Atlantic Treaty Organisation allies. There were no signs of a breakthrough after the hour-long talks. Let's see if we'll have the potential to get there after Erdogan's speech.

More broadly, concerns over the sickly Turkish economy's wider impact were intensified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank had began to look more closely at eurozone lenders' exposure to the country.

Erdogan retaliated last weekend with sanctions of his own against the American counterparts of the sanctioned Turkish ministers.

The new economic action plan calls for Turkey to issue a renminbi bond and borrow from China to proceed with 400 new infrastructure and other showpiece projects whose value is estimated at $9 billion.

"In any case, sanctions on the Turkish banking sector would be catastrophic as Turkey is dependent on capital inflows to finance its high current account deficit".

This could therefore well translate into the Euro staying under pressure.

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