Lira Slides Most Worldwide, Erdogan Aide Cites Downgrade Rumors

(Bloomberg) -- The Turkish lira slid against the dollar for the second day, trimming the biggest weekly gain in nine months, and bonds fell as President Recep Tayyip Erdogan’s chief economic adviser said speculation over a potential rating downgrade had fueled the currency’s weakness.

Lira Slides Most Worldwide, Erdogan Aide Cites Downgrade Rumors

The lira’s slide on Thursday was due to “various speculations,” including one about a possible rating downgrade, Cemil Ertem said in a live interview with state-run TRT television, without elaborating. Fitch Ratings has prepared a report that will take some Turkish banks to rating watch negative, according to a person with direct knowledge of the issue, who asked not to be named because the report hasn’t been published yet.

The lira fell as much as 2.7 percent on Friday, the worst performance among global currencies, to 4.6465 per dollar. The yield on 10-year notes jumped 42 basis points to 14.73 percent, taking an increase since Tuesday to more than 70 basis points.

Uncertainty over how policy makers will respond to inflation also weighed on the lira. Data due Monday will show consumer-price increases quickened to 12.15 percent in May, according to the median estimate in a Bloomberg survey, approaching a 14-year high of 13 percent reached last year.

While the central bank is said to be prepared to raise interest rates again if inflation picks up pace, analysts at Capital Economics in London say it will likely to stay on hold at the next meeting on June 7.

“Given that a semblance of calm has descended on markets over the past week, we think the central bank will refrain from raising interest rates further at this meeting,” Jason Tuvey, an emerging-market economist at Capital Economics, wrote in a note to clients. While the lira’s recent rally may have a bit further to run, it will weaken again toward the end of the year and further in 2019 and 2020, he said.

The currency has rebounded more than 7 percent from a record low last week and bond yields have retreated from recent highs after the bank was forced into an unscheduled 300-basis-point rate hike to stem a market rout fulled by concern that monetary policy was too loose.

But some investors worry that more tightening will be needed to contain price pressures. The lira has weakened more than 10 percent against a basket of euros and dollars over the past month, and the depreciation now threatens to feed into higher import prices.

“The lira is not out of the woods,” analysts including Tatha Ghose at Commerzbank AG in London wrote in a note. “If the central bank were to skip a rate hike on June 7 simply because temporary calm happens to prevail at the time, that would be confirmation that, despite the assurances, the central bank’s ‘behind-the-curve’ style has not changed.”

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