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Turkish lira hits rock bottom as central bank sits back

Mustafa Ozer | AFP | Getty Images

Turkey's struggling currency hit a new all-time low against the dollar on Tuesday after Erdem Basci, the central bank's president, said he had no concerns over current exchange rates.

The Turkish lira, which has fallen over 13 percent against the dollar since the start of the year - fell sharply to a new record low of 2.021 after Basci's comments from 1.9918 late on Monday.

The bank's president, speaking to the Turkey's Anadolu news agency, said that he would not use interest rates to defend the lira and said that investors should not be surprised if the U.S. dollar falls back to 1.92 against the Turkish lira by the end of the year. He added that additional tightening measures could be implemented next Monday, signaling that the bank could use currency intervention instead of an interest rate rise.

"The recent rise in currency rates is temporary," he told the news agency on Tuesday. "We have no worries about exchange rates."

Stocks in Turkey also fell with the Borsa Istanbul National 100 Index sinking 2.46 percent on Tuesday morning.

Timothy Ash, head of emerging markets research at Standard Bank, described the central bank's approach as "strange" and added that Basci was "tearing up the central banking rule book" with his unorthodox policy.

"He seems to be taking away one of his few bullets in the gun by not allowing himself the option of not using interest rates," he told CNBC, adding that the situation had become "high risk". The large current account deficit for Turkey and external financing requirements meant the lira would continue to be biased towards weakness, he said.

Concerns over the moderation of the U.S. Federal Reserve's bond-buying program have hurt emerging markets across the globe as investors pull money back to the U.S. Turkey is just one of many countries that relies on these foreign inflows and "taper" fears have caused the currency to plummet against the dollar. Stocks have fallen 26 percent since mid-May.

Turkey's central bank has been tightening monetary conditions to support the lira using a range of tools, but has left its main benchmark rate unchanged at 4.5 percent. So far the central bank has failed to stop the rot, with some analysts predicting growing tensions in Syria will add to the sell-off.

"The recent developments in Syria signal possible military intervention and this is negative for economies like Turkey," Fatih Keresteci, a strategist at HSBC Bank in Turkey told Reuters.

"The Turkish Central Bank's hyperactive monetary policy, which aims to reduce the selling pressure, creates a second wave of selling tendency because it creates uncertainties. The lira will remain under pressure unless the central bank switches to an orthodox policy and makes lira relatively attractive again."

Jeffrey Halley, senior manager of FX trading at Saxo Capital Markets believes that recent moves in the currency were due to a "perfect storm" of concerns over escalating tensions in Syria and "tapering" fears.

"It's unfortunately an emerging market deficit country that puts it in a less than salubrious group," he told CNBC Tuesday following Basci's comments. "Also, it shares a very long border with Syria and is also openly supportive of the rebel movement against the Syrian government."

The Turkish lira hitting the 2.0 mark against the dollar was a "huge level", he said, with lots of speculative trades being broken by the movement higher.

Overnight interest rates have been tweaked recently by the central bank but the main one-week rate was left untouched at its latest meeting on August 20.

"The weakness in capital flows that started in May due to heightened uncertainty regarding the global monetary policies continued. The Committee has indicated that these developments along with a more cautious monetary policy stance will bring the credit growth rates gradually to more reasonable levels," the Bank said in an announcement made at the time of the rate decision.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

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