Euro Gaps Lower After Lira Tumbles and Dollar Rallies, Eyes GDP

Randal Sanchez
August 13, 2018

"The Central Bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary", the Central Bank of the Republic of Turkey said.

Namely, within the tightening of economic measures, US President Donald Tramp chose to double customs duties on Turkish steel and aluminum, speeding up the fall of the Turkish currency, which lost 16 percent on the dollar on Friday.

On Friday the relentless slide turned into a crash: the lira dropped as much as 18 per cent, hitting US and European stocks as investors took fright over banks' exposure to Turkey.

The lira is now down around 45% against the dollar since the start of the year, making it far harder for Turkish companies to pay back loans they have taken out in the United States currency. Shares in Europe's major banks also lost ground.

The lira dived to a record low of 7.24 to the dollar at one point overnight before recovering slightly after the country's finance minister said Ankara was planning to roll out an "action plan" on Monday in response to the crisis.

Bankers said it was too early to say for sure that the bank had reverted to using an interest rate corridor.

The moves will free up 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity in the financial system, the bank said.

Simon Derrick, chief currency strategist at BNY Mellon, said the central bank's measures are unlikely to be enough.

Isik said the lira's current levels would add between 4 and 5 percentage points to headline inflation in coming months, pushing it up to around 21 percent in September from almost 16 percent last month. "We will see if that is the case by Friday", said the foreign exchange trader.

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The Euro suffered amidst concerns for European banks with substantial Turkish exposure and reports confirmed the European Central Bank (ECB) was indeed taking notice prompting markets to view developments as a potential reason for the central bank to delay impending policy changes.

The currency hit a record low of 7.23 per dollar late on Sunday after Mr Erdogan, in a series of speeches over the week, showed no sign of backing down in the stand-off against America, a North Atlantic Treaty Organisation ally.

Investors have been seeking an outright hike in the policy rate to halt the currency's losses but the bankers say that readopting the corridor could substitute for higher rates.

Capilano Honey soared 25.4 per cent to $19.62 after a takeover offer at $20.06 in cash for the honey maker from Albert Tse's Sydney and Hong Kong-based Wattle Hill and ROC Capital, equivalent to nearly $200 million.

Albayrak said in an interview published on Sunday that Turkey will start implementing an economic plan to ease investor concerns, stressing budget discipline and pledging that fiscal rules would be implemented for targeted indicators if necessary.

"We can only say "good-bye" to anyone who sacrifices its strategic partnership and a half century alliance with a country of 81 million for the sake of relations with terror groups", Erdogan said.

But some market analysts are advising investors against abandoning emerging markets in general as result of the turbulence in Turkey.

Investors are turning against emerging markets as the rising prospect of a prolonged trade war compounds a backdrop characterized by a more hawkish Federal Reserve and European Central Bank.

Erdogan is ignoring calls to increase interest rates, but economists are warning that if confidence isn't restored quickly, Turkey could lurch into a recession and debt crisis requiring a bailout from the International Monetary Fund.

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