Turkish lira and bonds battered on US trade threats

Turkey’s lira slipped in and out of negative territory yesterday, staying close to the previous day’s record low as concerns deepened about a rift with the United States and President Tayyip Erdogan’s influence over the central bank.

On Monday, the currency fell as much as 5.5 per cent to 5.4250 against the dollar, an all-time low and its biggest intraday drop in nearly a decade, after Washington said it was reviewing access to the US market for Turkey’s exports.

Turkey’s 10-year benchmark bond yield hit 20.09 per cent, the highest on record, while the lira was trading at 5.3035 to the dollar at 12.01pm GMT and at 6.1535 per euro. The depth of the sell-off reflects growing unease about the direction of monetary policy under Mr Erdogan, a self-described “enemy of interest rates”, and the impact of worsening ties with the US, a Nato ally and major trading partner.

The lira’s chronic weakness – it is down 27 per cent on the dollar and 26 per cent against the euro year-to-date – has driven inflation to nearly 16 per cent and fuelled expectations that an emergency rate hike may be needed.

“The plunge in the currency over the past few weeks is now on a scale which has, in the past, prompted the central bank to hike interest rates aggressively,” William Jackson of Capital Economics said.

“The lira’s fall is being amplified by concerns that the central bank will not act to shore up the currency.”

The central bank raised interest rates to support the lira in an emergency move in May, before a re-elected Mr Erdogan assumed new executive powers that investors fear will compromise its independence. The president wants lower borrowing costs to fuel credit growth and economic expansion. Economists say the economy is overheated and needs higher rates.

The central bank’s apparent reluctance to raise rates has heightened concerns about its ability to act independently of Mr Erdogan, who appointed his son-in-law Berat Albayrak as treasury and finance minister last month.

At the weekend, the US Trade Representative said the US was reviewing Turkey’s duty-free access to its markets, after Ankara imposed retaliatory tariffs on US goods in response to American tariffs on steel and aluminium. The move could affect $1.7 billion of Turkish exports.

The row has further hammered the lira, which lost nearly a quarter of its value last year, even after a cut to the upper limit of banks’ reserve requirements that the central bank said would provide lenders with $2.2bn of liquidity.

“In an environment where the market expects an interest rate hike, the central bank only changed reserve requirements,” said economist Mahfi Egilmez on Twitter.