Turkish lira weakens on concern for U.S. sanctions, rate cut

The Turkish lira may be facing more losses after dropping for a fifth-straight day on Wednesday.

Investors are selling the currency this week fearful that the United States could soon impose damaging sanctions on Turkey’s fragile economy in retaliation for Ankara’s purchase of S-400 missiles from Russia.

The lira fell 0.4 percent to 5.788 per dollar at 12:20 p.m. local time in Istanbul. It traded stronger than 5.5 against the dollar a month ago.

The United States is considering placing sanctions on Turkey over its purchase of the Russian-built air defence systems, U.S. Treasury Secretary Steven Mnuchin said on Monday. Economic sanctions imposed last year for Turkey’s detention of a U.S. pastor helped spark a currency crisis.

Washington expelled Turkey from the F-35 fighter jet programme in July after the first delivery of S-400s was received. The U.S. Congress has also passed bills requiring the Trump administration to impose measures on Turkey under 2017 legislation designed to discourage countries from defence partnerships with Russia.

After the S-400 shipments began, U.S. President Donald Trump asked the Senate for “flexibility” on dealing with Turkey and is believed to oppose the sanctions.

NATO officials say the presence of the Russian systems could allow Moscow to gain sensitive information on the F-35s through subterfuge.   

The lira also declined on Wednesday due to concern over whether Turkey’s central bank will decide to cut interest rates more than investors expect in a meeting on Thursday. Polls by Reuters and the state-run Anadolu news agency predict a rate cut of 250 basis points to 17.25 percent. But at the weekend Erdogan said Turkey would make substantial cuts to interest rates and inflation into single-digit territory.

There is a “bit of nervousness that the CBRT might do much more than is priced in,” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments to his clients.

Ash referred to a report this week in the Turkish press that the central bank was poised to reduce interest rates by 500 basis points.

The lira is pressuring key barriers at 5.7908 and 5.8031 per dollar, Slobodan Drvenica of Windsor Brokers said on currency news website FX Street on Tuesday. He cited the U.S. sanctions threat as a reason for the losses.

The lira could test 5.9 per dollar and weaker should more dollar bulls emerge. A decline to 5.94 should not be ruled out, Drvenica said.