SYDNEY — The Turkish lira plunged further at the start of trade in Asia on Monday, after a meltdown on Friday that rattled global markets.
The fall in the lira is a risk to Turkish banks, with around one-third of their debt held in foreign currency. European banking stocks fell on Friday and the nervousness spread to the US, where the S&P500 finished down 0.7%.
“Investors are clearly concerned that Turkey’s government won’t act (or allow the central bank to act) to shore up the currency, and fears are mounting that this could result in a crisis in Turkey’s banking sector,” wrote William Jackson, chief emerging markets economist for Capital Economics, in a client note. “After all, over a third of domestic lending is in foreign currencies, and banks have substantial short-term external debt.”
After losing around 18% against the US dollar on Friday the lira plunged another 10% as Asian currency markets opened on Monday at 7am AEST. It was trading at 7.09 against the US dollar before recovering some of the losses. A short time ago it was at 6.86, down 7% on Friday’s close. (A higher number indicates a weaker lira). Low liquidity early in Asian trade may be a factor in the volatility. Here’s the chart:
Turkish president President Recip Tayyip Erdogan exacerbated problems on Friday when he urged citizens to sell dollars and gold in exchange for lira. Over the weekend Erdogan said there was a “currency plot” against Turkey and argued the fall in the lira was not connected to economic fundamentals.
Adding to Turkey’s problems, the Trump administration doubled tariffs on the country’s steel products on Friday. US President Donald Trump referred to the plunging lira in a tweet.
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!
— Donald J. Trump (@realDonaldTrump) August 10, 2018
Relations between Ankara and Washington have been strained over the detention of American evangelical pastor Andrew Brunson on terrorism charges. Trump is reported to have discussed his case with Turkish President Recep Tayyip Erdogan over the phone.
Erdogan assumed new financial powers after Turkey’s election last June, and investors have been concerned that fiscal policy setting have been too loose.
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