Turkish Lira on the ropes amid worries, dollar rally

ISTANBUL/ LONDON

Turkey’s record-low lira was among a host of heavyweight emerging market currencies pinned to the canvas on May 16 after the dollar put on another show of strength.

A rout that has taken hold in poorer economies in recent weeks was showing little sign of easing, having been compounded by another push up in global borrowing costs and generous helpings of political strife.

The dollar held firm near a five-month high on May 16 helped by gains in long-term U.S. Treasury yields.

The lira, which along with Argentina’s peso has been at the heart of the storm, slipped toward 4.5 to the dollar and hit a new low versus the euro after President Recep Tayyip Erdoğan said he would take more control of interest rates if he wins elections next month as expected.

Erdoğan, in an interview with Bloomberg Television on May 15, said the Turkish Central Bank, while independent, would not be able to ignore signals from the new executive presidency that comes into effect after the June polls.

A self-described “enemy of interest rates,” Erdoğan wants borrowing costs lowered to fuel credit. “I will take the responsibility as the indisputable head of the executive in respect of the steps to be taken and decisions on these issues,” he said in the interview.

Erdoğan’s investor meeting

Meanwhile, fund managers who met Erdoğan and his delegation in London on May 15, part of a three-day visit to Britain, were baffled about how he plans to tame rising inflation and a currency in freefall - while simultaneously seeking lower interest rates, according to a follow-up Reuters release.

Speaking on condition of anonymity due to the political sensitivity of the meetings, investors told Reuters they were flabbergasted by his stance and willingness to go into battle with world markets at such a fragile time.

A portfolio manager, who attended a meeting with Erdoğan, said the president had been “very honest” and clear about where he expected interest rates to go if he should win the elections on June 24.

“Erdoğan ... said when he [is re-elected] president, he will ensure rates will be low, not high,” the portfolio manager said. “His view is that high rates lead to high inflation, I’m not sure I agree with that view.”

Having weakened five straight years already, the lira is on track for a 15 percent fall since the start of the year against the dollar - making it one of the worst performing emerging market currencies, amid various economic concerns, including a persistently high inflation rate.

“He thinks the market is a bunch of speculators, and that is not his audience, his audience is ordinary people in Turkey and they need lower rates,” said another asset manager, whose firm also attended the Erdoğan’s meeting.