TURKEY’S lira fell to record lows on Friday rattled by domestic political tensions and the U.S. Federal Reserve’s decision to start trimming its monetary stimulus programme, prompting the Turkish central bank to threaten more market action.
Already hammered this year by expectations that the Fed would begin to stem a flood of dollars that has boosted global emerging markets, the bank has sold dollars regularly to prop up the lira and stop domestic inflation from getting out of hand.
On Friday it increased its forex auction to $400m from $50m after saying it could sell as much as ten times the announced minimum amount on days of excessive volatility.
The actions had little immediate lira impact but analysts said chances were it might follow that threat with direct intervention in markets next week.
“Turkey-specific developments will determine whether the lira will negatively decouple in the coming period. In a quiet Christmas week, the bank may intervene directly,” said Ali Cakiroglu, a strategist at HSBC Portfolio.
The bank has sold $50m to $100m at regular auctions this year, while also stemming domestic banking liquidity, to try to stabilise the lira in lieu of raising official interest rates.
Policymakers’ message that they will not raise interest rates to support the lira also speaks for it intervening first. It last did so at the start of 2012.
But some analysts believe the central bank may not have enough firepower to combat sustained pressure on the lira.
Turkey’s need to import almost all of the oil it uses gives it one of the world’s biggest current account shortfalls, making it dependent on inflows of investment and more exposed to any tightening of the supply of cash globally.
Its central bank, whose policy has been heavily influenced by the Fed this year, kept interest rates on hold earlier this week but moved to tighten liquidity sharply as it worried about the impact of the withdrawal of U.S. monetary stimulus.
A corruption probe, termed by Prime Minister Tayyip Erdogan a “dirty operation” to tarnish the government, has seen 50 people including three cabinet ministers’ sons, prominent businessmen and local government officials detained this week.
Dozens of senior Turkish police officers have since been removed from duty accused of abuse of office for keeping the investigation quiet from higher level officials in security institutions. Late yesterday, further dismissals were still being reported.
The lira touched an all-time low of 2.0983 against the dollar, compared to 2.0780 late on Thursday. It stood at 2.0895 by 1535 GMT.
The main stock index closed up 0.66 per cent after sustaining heavy losses on Tuesday and Thursday. The yield on Turkey’s benchmark 10-year bond ended the day at 10.09 per cent, after earlier touching three-month highs of 10.19 per cent.
