Turkey ETF Retreats on Rate Hikes Expectations Due to Plunging Lira

USD  TRY EUR  TRY Jump to Record Highs on Lira Weakness

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The Turkish lira reached 7.21 against the dollar as market concerns about the country's macroeconomic management rose.

Turkey's lira set a new record low against the USA dollar on Thursday as investors anxious about the government's economic policies and dollar reserves appeared to be running low.

In point of fact, the Turkish economy, which has been in the brink of a United States sanction since past year over purchasing of Russ anti-aircrafts, had already been in a recession before the onset of the pandemic outbreak. In the view of analysts from Goldman Sachs and Oxford Economics, rate increases may be warranted soon.

Investors, analysts and sources close to Turkey's central bank say the most direct solution to the lira's costly slide, in the form of a rate hike, would only happen as a last resort.

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Looking ahead, analysts increasingly anticipate Turkey's central bank, which cut rates to 8.25% by May from 12% at the end of past year, will have to roll back those cuts.

In response to market turmoil, the central bank issued a statement that said it plans to roll back the liquidity measures taken to support the economy during the global pandemic while making no reference to interest rates. The central bank said the effects of the pandemic on the Turkish economy had been limited so far, saying "recent data suggest that economic recovery has gained pace". Limiting access to the lira makes it harder for foreign investors to bet the currency will weaken. The cost of insuring against default on $10,000 of five-year Turkish dollar-denominated bonds using derivatives contracts called credit default swaps climbed to $589 a year Thursday, from $238 a year in February.

On Thursday, Turkey's banking regulator partially eased access to the lira for foreign banks, so long as transactions are to buy lira-denominated assets or deposit lira in local banks.

Fair value for the currency is about 7.5 lira to a dollar, based on estimates of Turkey's financing needs from its current account balance, according to the Institute for International Finance.

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The currency is down almost 20% versus the dollar this year, among the worst performers in emerging markets, even though the greenback itself has sagged.

Ankara's appeals for funding from the U.S. Federal Reserve and other central banks have only yielded a deal with Qatar.

David Gauthier-Villars contributed to this article.

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