Lira Defies Turkey’s $2.5 Billion Defense as Rout Deepens

Turkish state banks sold at least $2.5 billion to help prop up the lira this week, trying to shield it from foreign outflows and demand for foreign currency spurred by a widening current-account deficit.

Yet, the lira fell as much as 1.5% against the dollar Tuesday before paring its decline. On Monday, it tumbled the most since April in intraday trading, nearing the psychological 7-per-dollar mark.

Turkish government-run lenders sold at least $1.5 billion to support the lira on Tuesday and about $1 billion on Monday, according to three people with knowledge of the matter. While the lenders don’t comment on their activities in the foreign-exchange market, traders say such interventions have kept the currency in a tight range for more than a month.

Lira Defies Turkey’s $2.5 Billion Defense as Rout Deepens

“Seems like a big battle is under way,” said Timothy Ash, a strategist at BlueBay Asset Management in London. “The lira is now a heavily managed exchange rate.”

The lira’s weakness looks starker when set against the deepening losses in the dollar, analysts said. The U.S. currency as measured by the Bloomberg Dollar Index has retreated to a two-year low and is heading for a fourth monthly decline.

It also lays bare the cost of economic policy in Turkey this year. While a front-loaded easing cycle and state-sponsored credit binge have softened the blow from the coronavirus pandemic, they have exacerbated the economy’s vulnerabilities and left the currency exposed.

Meanwhile, an attempt to contain volatility in the lira by restricting foreign investors’ ability to trade the currency has compounded a flight from Turkish assets. Foreigners have pulled more than $12 billion out of the local-currency bond and equity markets in the past 12 months.

The current-account balance swung back to a deficit in December and analysts in a Bloomberg survey project it will widen to 2% of gross domestic product for 2020. The fiscal shortfall may more than double in the year to 6.5% of output.

Apart from the Argentinian peso, the Turkish lira is the only major emerging-market currency to have fallen since the dollar peaked on March 23, unable to catch a break from the prospect of looser financial conditions that a weaker U.S. currency affords their economies.

The underperformance is telling given how much money authorities have spent on currency interventions.

Turkey’s gross currency reserves have dropped almost 40% since the beginning of the year to $49.2 billion. Reserves including gold stand at $89.4 billion. As of the end of June, $54.4 billion of that was money borrowed through short-term swaps, central bank data showed.

The lira weakened 1.2% to 6.9522 per dollar as of 6:27 p.m. in Istanbul, one of the worst performances in emerging markets.

©2020 Bloomberg L.P.

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