Turkish lira falls to record low as US sanctions hit

The Turkish lira may slide another 5 to 10 per cent before recovering to 5 per dollar by the end of the year, according to a report by Dutch bank ABN Amro. EPA

Turkey’s lira slumped to a record low against the dollar on Tuesday before the United States imposed unprecedented penalties against its Nato ally over the continued detention of Pastor Andrew Brunson.

The currency slumped as much as 1.7 per cent to 4.9985 per dollar, approaching the key 5.00-$1 level, before the US announced the first two individuals it would target on Recep Tayyip Erdogan’s government. The sanctions are meant to punish Turkey for imprisoning US citizens and employees of its diplomatic mission.

Turkey remains particularly exposed to shifts in investor sentiment, given its large external financing needs. Any slowdown in capital flows triggered by such a move could weigh on the currency and bonds.

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“It is clearly very tricky time for the Turkish economy,” said Timothy Ash, a strategist at BlueBay Asset Management in London. “The timing could not have been worse, which perhaps also will make the US think long and hard about going down this route.”

The lira has shed more than a fifth of its value this year against the dollar, hampering the ability of companies to repay foreign-currency loans, fueling double-digit inflation and bruising holders of local currency debt with a more than 30 per cent loss this year, the biggest after Argentina among emerging markets, according to Bloomberg Barclays indexes.

“The market will be watching the unfolding of the new diplomatic spat with great anxiety which is likely to translate in a weaker lira,” analysts including Cristian Maggio, head of emerging-market strategy at TD Securities in London, wrote in a note to clients.

Breaking the 5.00 level would probably extend the sell-off, they said, and recommended investors short the currency, targeting a slump to 5.25.

“The risk-reward of getting much more constructive at this stage is simply not there,” said Nick Eisenger, a London-based strategist at Vanguard Asset Management. “Turkish assets can sell off a lot more at the sovereign level.”

The currency trimmed its loss to trade 1.3 per cent lower at 4.98 as of 7.58pm on August 1 in Istanbul. The nation’s bond and stock markets were closed when the news broke.