Turkish lira weakens past 7 per dollar in test of central bank resolve

Turkey’s lira fell to its lowest level against the dollar since mid-May on Wednesday, providing a test of the central bank’s resolve in defending the currency.

The lira fell to as low as 7.03 per dollar. It traded down 1.7 percent at 7.01 per dollar in early afternoon trading in Istanbul, taking losses this year to 15 percent.

The Turkish central bank has sought to protect the lira’s value and its dovish stance on monetary policy by selling tens of billions of dollars of its foreign currency reserves this year. The bank, seeking to back the government’s pro-economic growth policies, has slashed interest rates to 8.25 percent from 24 percent since last July, putting rates in negative territory when subtracting inflation of 11.8 percent.

“Feels a bit like the central bank might finally be stepping back and allowing the FX to find a better level to defend which would be logical,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.

The central bank’s low interest rate policy has provided a springboard for a flood of cheap lending by state-run banks, which has in turn boosted demand for imported goods and widened the country’s current account deficit. Turkey must find hard currency to finance that deficit, but tourism revenues and foreign investment have slumped along with the central bank’s reserves.

Turkey’s economy was hit by a currency crisis in the summer of 2018, partly due to investor concerns about an overheating economy. A political crisis with the United States over the detention of a U.S. pastor on terrorism charges, which resulted in economic and political sanctions, pushed the lira over the edge, forcing the central bank into emergency rate hikes.

The lira hit an all-time low of 7.269 per dollar in mid-May, before regional ally Qatar stepped in to fund the central bank with as much as $10 billion worth of cross-currency swaps.  

Turkish President Recep Tayyip Erdoğan fired and replaced the central bank's governor last July for failing to lower interest rates.