Turkey’s lira collapses to record low against US dollar

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Turkey’s lira fell to a new record low against the US dollar on Monday, as investors weighed up tightening steps by the central bank and looked ahead to this week’s rate-setting meeting.

The lira weakened more than 0.25 percent to 7.3880 against the dollar by 0645 GMT, from a close of 7.3650 on Friday.

While expectations of a formal rate hike to stem the lira’s decline has increased, the central bank has so far used back-door measures to raise the cost of funding, including liquidity steps and directing lenders to borrow at a higher rate.

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The bank’s weighted average cost of funding stood at 9.06 percent as of Friday, compared to a low of 7.34 percent on July 16.

The central bank’s tightening steps are important for the lira, which has not fallen as rapidly as it did during the currency crisis of 2018, a banker from a commercial lender’s treasury department said.

“Even though it renewed record (lows) last week, these were limited in terms of percentage value. The main factor here is the tightening steps and these being reflected on deposit, loan and other interest rates,” the banker said, adding that yields on lira deposits had increased 2-3 percentage points across the banking sector compared to a month ago.

The central bank will announce its rate decision for August on Thursday. Some analysts expect the bank to raise its policy rate, while others expect it continue tightening policy through liquidity steps instead of a formal hike.

President Tayyip Erdogan said on Friday he would convene his economic council to discuss developments. He said Turkey had faced such attacks before and was on “solid ground.”

Milliyet daily reported on Monday that the meeting will be attended by the central bank governor, heads of the BDDK banking watchdog and the Capital Markets Boards, as well as managers of Turkey’s wealth fund and representatives from state banks.

Finance and trade ministers, as well the vice president and an economy commission head will also be attending.

The officials will discuss making up for tourism revenues lost due to the pandemic, incentives provided to support the economy, employment numbers, as well import and export data and exchange rate volatility, Milliyet reported.

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