Volatile Turkish lira tumbles to record low vs euro

Turkey’s lira skidded to record lows against the euro and other currencies on Wednesday, as concerns over depleted reserves and local demand for dollars brought a third day of selling despite costly state efforts to stabilize trading.

The currency slipped beyond 7 versus the dollar, close to a historic low set in early May, after the central bank governor downplayed concerns over a drop in the FX buffer and stuck to what some analysts called an over-optimistic view on inflation.

Beginning with a brief plunge late on Monday, the volatile trading this week has seen the lira break out of a tight range around 6.85 in which it had virtually flatlined for two months.

Data and sources show the central bank and, in recent months, state banks have sold tens of billions of dollars to keep the lira stable. Sales surpassed $1 billion per day this week according to bankers’ calculations.

In total, they calculate these interventions amounted to some $110 billion since they began early last year. In turn, the central bank’s gross FX reserves have fallen to $49 billion from $81 billion so far this year.

The burst of lira selling could signal the interventions are running out of steam, some analysts said.

“Probably local banks are up against their limits (after) intervening on behalf of the central bank and they cannot really do that anymore,” said Viktor Szabo at Aberdeen Standard Investments.

He added that local demand is driving the lira after hard currency deposits reached a record high of nearly $204 billion in mid-July.

The lira <TRYTOM=D3> was down 0.6% at 6.98 against the dollar by 1630 GMT, after earlier touching 7.005. Its all-time low is 7.269 set on May 7.

The currency <EURTRYD3=R> touched a low of 8.2408 against the euro, and also hit its weakest level against a basket <TRYBASKETD3=> of currencies. Istanbul’s main share index <.XU100> was down 1.5%.

The government has said the central bank may intervene at times to stabilize the currency.

Central Bank Governor Murat Uysal said earlier on Wednesday that reserves would naturally fluctuate during a pandemic, and he repeated that inflation would decline as soon as this month, sooner than most economists expect.

Two years ago concerns over central bank independence in part triggered a currency crisis that tipped Turkey’s economy into recession.

This year, coronavirus fallout is expected to shrink the economy again, while concerns have simmered that lost tourism revenues will swell Turkey’s current account deficit.

“It’s hard not to be negative on Turkey given the central bank’s credibility problem, a complicated geopolitical situation, and a weak fundamental starting point,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.


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