Turkish lira leads emerging market currencies lower

Turkey’s lira fell, leading a decline in major emerging market currencies, as investors sold the assets on concern for the global economic growth outlook.

The lira dropped 1.4 percent to 5.56 per dollar at 2:05 p.m. in Istanbul. Trading was thin due to a religious holiday. It had bucked the trend in emerging markets in recent weeks, rising to a four-month high.

The Turkish currency could be the target of a sell-off should monetary and fiscal policy continue to deteriorate, Kallum Pickering, a senior economist at Swiss bank Berenberg, told Bloomberg Television on Monday.

“Turkey is a very uncertain place to look at as an investor, as an economist,” Pickering said. “It’s ideally positioned – it’s between big Asia and big Europe.

“But what you have is an economy which is slowly but surely undoing a lot of the reforms of the last 30 years which led to it being a good place to invest,” he said.

The Polish zloty fell 0.1 percent to 3.86 per dollar. The Russian ruble declined 0.5 percent to 65.62 against the U.S. currency. The South African rand lost 1.2 percent.

The lira has been gaining even as President Recep Tayyip Erdoğan sacked the governor of the central bank in July for failing to cut interest rates. Policymakers reduced the benchmark lending rate by 425 basis points to 19.75 percent later in the month.

The Turkish currency had dropped to a record low of 7.22 per dollar in August last year after a political crisis with the United States over the imprisonment of a U.S. pastor compounded fears about the country’s overheating economy. An economic recession ensued.

Taha Akyol, a respected Turkish columnist, said on Sunday that the assimilation of Turkey’s central bank to the government’s low interest rate policies was now complete after new governor Murat Uysal replaced several of the bank’s senior officials earlier this month. Akyol made the comments in a column for the Karar newspaper.

“I think probably Turkey is not quite at the bottom of the pack and it benefits a bit from that,” Pickering said of recent gains for the lira. “But if things got really weird with the central bank - say interest rates got cut a lot - or if we saw with Erdoğan say a big fiscal stimulus I think markets could turn on Turkey pretty quickly.”

Investors are used to seeing the lira under perform its peers during an emerging market sell-off, said William Jackson, chief emerging markets economist at Capital Economics, according to Reuters.

“So, the last week or two was something of a surprise, now it seems more like its back to normal,” he said.