Turkey has launched a wide-ranging probe of foreign exchange transactions, a move some commentators say could chill foreign investment, as Ankara seeks to relieve pressure on the lira and assert its authority after weeks of mass protests.
The Turkish central bank sold $1.3 billion in foreign currency on Wednesday in a continuing effort to bolster the lira, as the banking regulator confirmed it was investigating foreign exchange transactions. Nevertheless, the lira weakened, nearing 1.96 lira to the dollar.
While the regulator said the probe was routine, market participants said the inquiry went into extensive detail, seeking to identify who has recently sold lira as well as the size of transactions.
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Turkey's Capital Markets Board has already begun a separate investigation into share manipulation prompted by what regulators say are abnormal levels of volatility in exchange and interest rates during the protests.
"The aim of this inquiry is to ensure the confidence of investors in our market; we don't have any other intention," said Vahdettin Ertas, CMB chairman, in an interview with the Financial Times. He argued that, since Turkey's macroeconomic fundamentals were strong, it was hard to explain the scope of recent falls in the Istanbul stock exchange, raising the possibility of market abuse.
Both the Capital Markets Board and the banking regulator are formally independent but, since the protests erupted on May 31, Recep Tayyip Erdogan, prime minister, has threatened to "throttle" speculators, accused a shadowy "interest rate lobby" of having manipulated the demonstrations and appeared to suggest that supporters use state rather than private banks.
This week Mr Erdogan chose as his chief adviser Yigit Bulut, a vigorous proponent of the theory that an interest rate lobby is plotting against Turkey and who recently claimed that foreign powers were trying to kill the prime minister by telekinesis.
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"For a country that claims that it has the strategic objective of being an international financial center to do any of these things – the rhetoric, the investigations of brokerages or of banks themselves – seems counterproductive," said a veteran observer of Turkey.
He added that an increase in interest rates was inevitable given that Turkey needed to attract capital to finance its large current account deficit, which is chiefly funded by short-term flows.
While the country's central bank is also formally independent, it has so far resisted increasing interest rates in light of the international retreat from emerging markets, opting instead to sell more than $6 billion in foreign exchange, bringing net reserves down to about $40 billion. It has also tightened liquidity by restricting lending to commercial institutions.
Meanwhile, Mr Erdogan has suggested that it is the interest rate lobby – generally understood to refer to domestic and international financial institutions – and the protests that are to blame for any slowdown in Turkish growth.
In a further move denounced by Turkey's opposition as a "witch hunt" in response to the upheaval, Turkey's parliament approved a new law late on Tuesday that would take powers and income away from the country's Chamber of Architects and Engineers, which played a leading role in the protests.
Arrests of protesters including protest organizers have also continued, leading the European Commission to express its concern at the detention of people "wishing to exercise their right to free assembly".
A 19-year-old protester died from his wounds on Wednesday, the fifth such casualty since the protests began. A police officer died in June.
About 50 protesters arrested this week said on Wednesday they were beginning a hunger strike, because of the length of their detentions.