Turkey’s Lira Slides Amid Questions Over Currency-Defense Tool

(Bloomberg) — Turkey’s lira snapped a five-day rally, challenging government assurances that it’s on a more stable footing after measures were introduced a week ago to stem its collapse.

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The currency slipped 6.2% to 11.3399 per dollar as of 1:42 pm. in Istanbul after trading as weak as 11.5831 earlier. The decline took the lira’s drop this year to more than 34%, the sharpest depreciation of any emerging-market currency during 2021.

Monday’s retreat came after President Recep Tayyip Erdogan said Friday that the lira will stabilize “gradually” after measures were brought in to shore up the beleaguered currency, including a new tool to shield lira-deposit holders. Central bank data also suggest authorities have been intervening in foreign-exchange markets. The moves drove the currency to a 54% gain last week, reversing a 15% loss the previous week.

“If the central bank’s possible sales of foreign currency diminish, an upward movement in the dollar-lira exchange rate may occur again,” Ibrahim Aksoy, the chief economist at HSBC Holdings Plc in Istanbul, said in a note to investors.

Erdogan’s comments suggest the government is seeking to guide the exchange rate below the 9 per-dollar level, according to Aksoy. Turks are continuing to buy foreign currency despite official assurances, he said.

Under the new mechanism announced last week, the government will make up for losses incurred by holders of lira deposits if the currency’s declines exceed bank interest rates.

Upward Movement

The lira’s depreciation accelerated in December as the central bank pressed ahead with interest cuts at the president’s behest, fueling concern the policy will hobble industry while fanning inflation at a time when the country is grappling with a surge in Covid-19 infections.

Confidence among Turkish manufacturers fell in December, according to central bank data released Monday, underscoring the currency’s gyrations. Capacity utilization rose to 78.7%, from 78.1% the previous month. The Turk-Is labor confederation said one measure of food inflation jumped 25.8% in December.

Turkey’s stock exchange applied the so-called uptick rule for the benchmark Borsa Istanbul 100 index on Monday after it gained as much as 5% in early trading. The rule requires that short sales be conducted at a higher price than the previous trade. It was up 1.2% as of 1:38 p.m. local time.

The omicron variant accounts for more than 10% of all Covid cases found in Turkey’s major cities, according to the health ministry. No additional restrictions will be imposed since hospitalizations aren’t significantly higher, it said.

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