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HomeHeadlineTurkish lira drops 7%, signaling move towards free market

Turkish lira drops 7%, signaling move towards free market

Turkey’s lira plunged 7% to a record low on Wednesday in its biggest daily selloff since a historic 2021 crash, a move traders said is a “strong signal” that Ankara is moving away from state controls toward a freely traded currency.

The lira has come under increasing pressure since President Tayyip Erdogan was re-elected on May 28. It stood at a record low of 23.17 against the dollar at 1023 GMT on Wednesday, bringing its losses this year to more than 19%.

For much of this year, authorities have taken a hands-on role in foreign exchange markets, using up tens of billions of dollars of reserves to hold the lira steady. The bank’s net forex reserves touched a record low of negative $4.4 billion last month, after forex demand surged during the election process.

Four traders said the decline in the central bank’s forex and gold reserves had stopped as of last week, and that they could enter an upward trend, along with signs of the change in forex policies.

“There are many regulations and changes that need to be made but the destination we are headed in is becoming clearer every day. We are going towards the lira’s value being determined by market conditions,” one trader said.

Erdogan announced his new cabinet at the weekend and named Mehmet Simsek, a former deputy prime minister who is well regarded by foreign investors, as finance minister. Simsek later said economic policy needed to return to “rational” ground.

Markets are also waiting for the appointment of a new central bank governor to replace Sahap Kavcioglu, who spearheaded rate cuts under Erdogan’s unorthodox policies.

“We are seeing policy normalisation play out,” said Tim Ash at BlueBay Asset Management. “I think we are seeing the impact of Simsek pushing (the Turkish central bank) for rational policy.”

Another trader said the lira was nearing “expected levels” with sharp intraday losses, adding these would continue for some time. “The lira is getting closer every day to a level that will not need to be defended with reserves,” the person said.

Source: Reuters

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