Lira Takes a Hit as Dollar Strength Catches Up With Turkey Bulls

(Bloomberg) -- The strength of the U.S. dollar is finally catching up with the lira.

After a rally that saw the Turkish currency buck an emerging-market rout over the past few months as the dollar gained, the lira is back to leading losses. It slumped as much as 1.5% to a one-month low of 5.7485 per dollar as of 5:46 p.m. on Tuesday.

The U.S. currency on Tuesday touched its strongest level this year against major peers, as measured by the Bloomberg Dollar Index. Traders with knowledge of the matter said foreign accounts were seen closing out their long lira positions, compounding the move.

Trade Angst, More Than a Reluctant Fed, Is Buoying Dollar

The Turkish currency -- one of the highest-yielding anywhere in the world -- has been a favorite among offshore carry traders looking to profit as funding costs in the U.S. and Europe nosedived in anticipation of central bank stimulus. But those wagers start to look hollow if the prospect of looser policy in the developed world fails to weaken the dollar.

Falling inflation in Turkey also opened the way last month for an easing cycle, bolstering lira bulls. Societe Generale SA this month recommended investors back the lira, targeting a rally to 4.70 per dollar. Citigroup Inc. opened a long position against the euro with a target of 5.85.

Turkey to Reward Banks That Lend More With Looser Reserve Rules

Some investors are now fretting that authorities are moving ahead with more aggressive policy easing than anticipated after the central bank on Monday tweaked its reserve rules to encourage credit growth.

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