Turkish Lira Declines as U.S. Sanctions Risk Sours Appetite

(Bloomberg) -- The lira fell for a sixth day as the prospect of U.S. sanctions dimmed the outlook for the Turkish currency.

The lira dropped as much as 1.7% to 8.0272 per dollar before paring declines, after President Donald Trump was said to have signed off on a package of penalties against Ankara over its purchase of Russian S-400 missile systems. Meanwhile, the European Union resisted Greek-led demands for tougher sanctions, and instead held out the possibility of weighing more punitive measures by March if Turkey continues its confrontational acts in the eastern Mediterranean.

Washington and Ankara are also at odds over U.S. support for Syrian Kurdish militants and Turkey’s spat with Cyprus and Greece over maritime boundaries.

The lira move was a “knee-jerk reaction rather than a major shift in market sentiment,” according to Rabobank strategist Piotr Matys in London. “If punitive measures are relatively mild and symbolic and the response from Turkey is fairly measured, the lira should trim its latest losses.”

President Recep Tayyip Erdogan’s overhaul of his economic team last month, accompanied by market-friendly policy pledges and a long-awaited rate hike, have helped the lira rebound from an all-time low. Still, the currency has moved weaker since an uptick in November’s inflation data, putting pressure on the new central bank chief Naci Agbal to deliver another large rate cut at the Dec. 24 meeting. Local investors bought $3.2 billion of hard currency and gold last week.

The decision will be “crucial” for the lira, according to Matys. “Governor Agbal may have to respond to those expectations by raising the policy rate further as the central bank cannot afford to disappoint the market,” he said.

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