Lira Falls to Record Low as U.S. Sanctions Two Turkish Officials

(Bloomberg) -- The lira slumped to a record low as the U.S. imposed sanctions on two Turkish ministers over the continued detention of an American pastor.

The sanctions target Turkey’s Minister of Justice Abdulhamit Gul and Minister of Interior Suleyman Soylu, both of whom “played leading roles in the organizations responsible for the arrest and detention of Pastor Andrew Brunson,” the U.S. Treasury Department said in a statement. The currency slumped as much as 2.1 percent to 5.0157 per dollar after two people familiar with the matter said the U.S. has prepared a list of Turkish entities and individuals to target should it decide to impose sanctions on Recep Tayyip Erdogan’s government.
Turkey remains particularly exposed to shifts in investor sentiment, given its large external financing needs. Any slowdown in capital flows triggered by such a move could weigh on the currency and bonds.

"It is clearly very tricky time for the Turkish economy,” said Timothy Ash, a strategist at BlueBay Asset Management in London. "The timing could not have been worse, which perhaps also will make the U.S. think long and hard about going down this route."

The lira has shed more than a fifth of its value this year against the dollar, hampering the ability of companies to repay foreign-currency loans, fueling double-digit inflation and bruising holders of local currency debt with a more than 30 percent loss this year, the biggest after Argentina among emerging markets, according to Bloomberg Barclays indexes.

“The market will be watching the unfolding of the new diplomatic spat with great anxiety which is likely to translate in a weaker lira,” analysts including Cristian Maggio, the head of emerging-market strategy at TD Securities in London, wrote in a note to clients.

Breaking the 5.00 level would probably extend the selloff, they said, and recommended investors short the currency, targeting a slump to 5.25.

“The risk-reward of getting much more constructive at this stage is simply not there,” said Nick Eisenger, a London-based strategist at Vanguard Asset Management. "Turkish assets can sell off a lot more at the sovereign level."

The currency trimmed its loss to trade 1.2 percent lower at 4.974 at 1:48 p.m. in New York.

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