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By now, everyone is staring at Turkey’s exchange rate crisis, it’s hard to say where the lira will end up. The Turkish currency was above 8.2 against the dollar on Wednesday morning, weakening by more than 5% last week. The lira has depreciated 38% against the dollar since the beginning of the year and 43% since October last year.
There are several reasons for the unstoppable fall of the Turkish currency:
- Investors have been concerned about the resurgence of Turkish-French relations in recent days. President Erdogan called for a boycott of French products after criticism in Paris.
- Relations with the EU are being undermined by the ongoing dispute between Cyprus and Turkey over the Mediterranean gas fields. At the moment, Ankara is refusing to abandon exploratory drilling in waters of disputed jurisdiction.
- Turkey has also joined the armed conflict in Nagorno-Karabakh against Armenia on the Azerbaijani side, Erdogan has stated that they are ready to provide armed assistance if necessary.
- The Turkish central bank remains reluctant to raise interest rates, experts say it should have made an adjustment to protect the lira months ago, but there is a lot of political pressure on the central bank.
In recent days, analysts dealing with Turkey have been asked how long the lira could fall, says Tatha Ghose, a specialist at Commerzbank, who begins her analysis on Wednesday morning. Based on the question, it is assumed that there is an equilibrium exchange rate from which the lira will not fall further. The other view is that there is a pain threshold at which the Turkish central bank “throws in the towel.” However, Ghose says this point is difficult to determine. Partly because of this, Turkey’s Finance Minister Berat Albayrak recently mentioned the positive aspects of the lira devaluation, which he said will bring new investment to Turkey. The minister also rejected the introduction of capital restrictions.
According to an analyst at Commerzbank, it is difficult, almost impossible, to predict the evolution of the dollar-lira exchange rate.
There is currently no reason why the Turkish currency should not fall until 9 in the next few weeks.
Although a possible increase in the interest rate from the Turkish central bank is no longer a credible step in the long term, a significant extraordinary adjustment in the short term could stop the currency from falling, believes Tatha Ghose. In addition, partial capital restrictions could put an end to the Turkish currency cane, at least temporarily, but in the medium term the situation will be much more complicated, as the Turkish leadership still does not recognize the existence of the problem.
Cover image: Shutterstock
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