The lira skidded to record lows against the dollar, euro and pound on Monday amid concern that Turkey could get more involved in a fast-escalating conflict in the Caucasus, despite last week’s surprise rate hike meant to support the currency.
The Turkish lira slid 2 percent against the dollar and was on track for its worst day since early August, when the latest bout of selling began hitting the currency that has shed half its value in less than three years.
The selloff erased a rally late last week when Turkey’s central bank unexpectedly hiked interest rates by 200 basis points to 10.25 percent, tightening policy for the first time in two years to stabilize the lira and address inflation.
But analysts who applauded the monetary policy pivot said the currency came under new pressure after heavy fire between Armenia and Azerbaijan, marking their worst clashes since 2016. Turkey said it supports Azerbaijan.
“Fears are that Turkey gets dragged into another regional conflict,” said Timothy Ash at BlueBay Asset Management.
The currency weakened as far as 9.1416 against the euro and 10.0974 against the British pound.
The lira was also hit by dollar strength, reaching a record low of 7.8325 by 1231 GMT - a decline of some 24 percent from the end of last year.
The currency has been among the worst performers this year on worries about Turkey’s depleted forex reserves and sharply negative real interest rates, and was now being hit by the growing geopolitical concerns.
At least 21 people were killed on Monday in the second day of heavy clashes between Armenia and Azerbaijan and President Tayyip Erdogan said Armenia must immediately withdraw from Azeri lands which it is occupying.
A treasury specialist at a Turkish bank said the moves by both the central bank and banking watchdog could brighten the overall dim investor sentiment around the lira – but they were muted by the geopolitical tension.
“We think the currency would have hit 8 versus the dollar without these steps due to tensions in neighboring Armenia and Azerbaijan,” the specialist said.
Until last Thursday’s rate hike, the central bank had relied on back-door methods to tighten money supply, using liquidity measures and directing lenders to borrow at a higher rate.
On Monday, Turkey’s BDDK banking watchdog said it was lowering deposit banks’ required asset ratio to 90 percent from 95 percent, further easing a rule that effectively forced private banks to lend more and buy more government debt.
The BDDK on Friday raised the limits for banks’ foreign currency transactions with foreign entities, allowing increased access to the market.
Turkey’s banking index was down more than 1 percent while the bluechip index BIST 100 was flat.