The Turkish lira plunged the most in more than a year to a new record on Wednesday as traders said state lenders had halted dollar sales to defend it, in a sign the government’s new economic administration is giving in on costly interventions.
The currency dropped about 7% to as low as 23.1621 per dollar, weakening for a 12th straight day. It was trading 6.2% lower at 11:15 a.m. in Istanbul.
President Recep Tayyip Erdogan’s appointment of former Merrill Lynch strategist Mehmet Simsek as treasury and finance minister in his new administration has sparked expectations of a return to a more orthodox economic policy set with reduced state intervention in markets. Since the second-round election on May 28, the lira has weakened more than 12% against the greenback.
Turkey’s state banks don’t comment on their interventions in the foreign-exchange market. A former governor of the central bank said in 2020 that state-owned lenders carry out transactions in line with regulatory limits and could continue to be active in the currency market.
In other Turkish markets, the main stocks index rose 3.1%, extending gains since the vote to 21% and reversing this year’s losses. Turkey’s dollar bonds also extended their advance, with the extra yield investors demand to hold Turkey’s dollar debt over US Treasuries narrowing 44 basis points this week, according to a JPMorgan Chase & Co. index.
The central bank’s next meeting to set interest rates is scheduled for June 22 and investors expect a hike, fueled by projections of a change at the top post, currently occupied by Governor Sahap Kavcioglu. Like Erdogan, Kavcioglu has championed low interest rates, cutting the benchmark rate from 19% to its 8.5% during his tenure even as inflation accelerated to a 24-year high.
Read more: Global Banks Try to Put a Number on Turkish Rate Hike This Month
Hafize Gaye Erkan, a banking executive in the US, is a potential candidate and met Simsek on Monday in Ankara, people with knowledge of the discussions told Bloomberg.
Read more: Turkey Sounds Out First Republic’s Ex-Exec Over Central Bank Job
Erkan worked for nearly a decade at Goldman Sachs Group Inc. and she’s the former co-CEO of San Francisco based lender First Republic Bank. Just over a year after her departure from First Republic, it became the second-biggest bank failure in US history.
Simsek and his team will face an uphill battle, with the lira’s weakness adding to elevated inflationary pressures ahead of local elections next year. Despite headline inflation’s slowdown last month, core inflation accelerated.
What Bloomberg Economics Says...
“We expect the government’s pricing and tax policies, together with pre-election and quake related fiscal spending and an accommodating monetary policy stance, to add to inflationary pressures going forward. As such, we forecast price gains to move back above 40% in the summer and end the year at 43%.”
— Selva Bahar Baziki, economist. Click here to read more.
Goldman Sachs Group Inc. analysts recently revised their forecast for the dollar-lira pair higher, citing increased pressure on the currency. The bank sees the lira depreciating to 28 per dollar in 12 months, compared with a previous projection of 22, according to a report dated June 3.
READ MORE: Erdogan’s Wall Street Guy Is Back to Replenish Wiped-Out Coffers
Japanese retail investor flows may have contributed to the currency’s swoon in early Wednesday trading, said Fujitomo Securities Chief Technical Analyst Tetsuya Yamaguchi. “As the Turkish lira kept weakening, there might have been some stop-losses triggered in the lira and yen market,” he said, noting increased volumes in the yen-lira trade.
--With assistance from Yumi Teso.
(Updates with context throughout and markets starting in third paragraph.)
