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Turkish Lira Strengthens to Two-Week High as Markets Bet on Rate Hike

October 21, 2020 at 16:21 by Andrew Moran

Closeup of the Turkish 20-lira noteThe Turkish lira is strengthening to its best level in two weeks against the US dollar. The lira, which recently crashed to a fresh all-time low, is finding support on widespread expectations that the central bank will raise interest rates to prevent further currency depreciation and to support the economy.

On Thursday, central bank officials will hold their October policy meeting. Analysts believe that Ankara will vote to continue tightening policy to reverse the lira’s record-breaking weakness. The central bank is forecast to raise its benchmark interest rate by 175 basis points to 12%. Some believe policymakers could raise rates by as much as 200 basis points.

For nearly a year, the central bank had been cutting rates, possibly at the direction of President Recep Tayyip Erdogan. He believed that the best way to fight inflation, support the lira, and stimulate the economy was through monetary easing. This defied basic economics, triggering a widespread rebuke from internal and external experts.

In the background to all of this are escalating geopolitical tensions. Turkey is involved – directly and indirectly – in two conflicts: the Armenia-Azerbaijan border dispute and the battle over maritime rights in the eastern Mediterranean with Greece. Others are also pointing to the gradual involvement in military conflicts and territorial disputes forming in Libya and Syria.

It is being reported that the lira’s slide could worsen amid potential sanctions from the US. Washington has been lamenting on Turkey’s plans to test the newly acquired Russian S-400 missile defense system, against the White House’s protestations.

Analysts at Barclays think that the only way Turkey will be able to survive is through intervention from the International Monetary Fund (IMF). Tourism revenue has been eliminated, travel throughout the Middle East has been suspended, and the unemployment rate stands at 14%. President Erdogan has vocally opposed the possibility of an IMF bailout, but with a cratering currency and “unorthodox” fiscal and monetary measures, Barclays believes it would be necessary, particularly if foreign exchange revenues continue their downward trend.

The lira has posted multiple record lows against the greenback this year. It also slumped to an all-time low against the euro earlier this month.

The USD/CNY currency pair tumbled 0.75% to 7.8066, from an opening of 7.8656, at 16:12 GMT on Wednesday. The EUR/CNY fell 0.32% to 9.2698, from an opening of 9.2982.

If you have any questions, comments, or opinions regarding the Turkish Lira, feel free to post them using the commentary form below.

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