Turkish Lira Hits Record Low Despite Central Bank Efforts

The Turkish lira fell on Thursday to a record low of 7.23 ₺ against the US dollar despite the central bank's efforts to reassure investors that the country's economy is recovering from the pandemic.

The currency reached previous lows in May of this year, and in a crisis that took root in the summer of 2018 to reach 7.30 ₺ against the dollar, after the authorities succeeded in supporting the lira earlier this year with huge sales of its currency foreign reserves.

The lira declined 3.6% to the lowest point in the day for the second day of intense selling after signs of imbalance in the country's financial markets, which prompted the need to raise interest rates.

“Something has to change. The country’s interventions in the foreign exchange market, and other tools that have been deployed to make it harder to sell the lira appear to be exhausted. some response is required, whether that’s administrative controls or rate hikes or something else, which is difficult to call with this government,” said Paul McNamara, emerging market portfolio manager at GAM in London.

Meantime, hours after the currency fell on Thursday, the central bank issued a statement saying that the country's economic recovery is moving in the right direction.

"Price developments in the markets are closely monitored. We are ready to take the necessary measures," the central bank added.

However the currency fell even further after the statement.

Turkish Lira deteriorates as Erdogan prefers easy money

In the past twelve months, Turkey's main rate has dropped by 15.75 percentage points, with significant cuts that began long before the coronavirus as Turkish President Recep Tayyip Erdogan has a clear preference for easy monetary policy.

Goldman Sachs estimated the central bank spent $65 billion of its foreign exchange reserves in the first six months of the year, far more than the $40 billion it spent in the entire last year.

The decline in central bank reserves in dollars and deteriorating fundamentals indicated a "bumpy ride" for the lira that could force the central bank to raise interest rates this year, said Dirk Wheeler, currency strategist for emerging markets at Citigroup.