The U.S. dollar strengthened to its firmest level against major rivals on Friday, while Turkey’s currency was driven sharply lower.
The steep decline in the Turkish lira comes after the European Central Bank expressed concern about the country, whose leader President Recep Tayyip Erdogan was re-elected in a snap vote in June and whose growing power has raised questions about the independence of the country’s central bank.
The lira USDTRY, +8.0305% has been consistently hovering around an all-time low against the U.S. dollar this summer. It fell by about 5.3% against the greenback, paring more severe losses overnight. One dollar recently bought 5.8595 Turkish lira, compared with 5.5426 late-Thursday in New York, according to Dow Jones Market Data.
According to FactSet data, the country’s lira is down 13.3% this week, bringing its year-to-date decline to more than 35%.
The ECB has grown increasingly concerned about potential contagion from Turkey’s problems, especially in the banking sector, according to a report from the Financial Times (paywall).
The ICE U.S. Dollar Index DXY, +0.45% which gauges the dollar against a half-dozen monetary units, surged amid the turmoil, and recently was up 0.6% at 96.039.
The euro EURUSD, -0.6768% , the most significant component of the dollar gauge, tumbled against the greenback, highlighting the spillover effect of Turkey’s dilemma on European markets. One dollar bought $1.1453 compared with $1.1526 late Thursday in New York, a decline of 0.6%. The British pound GBPUSD, -0.5459% also took a hit against greenback. Sterling last bought $1.2758, versus $1.2824 Thursday.
“For some days, global markets have noted the Turkish lira’s plunge with more curiosity than concern, seemingly viewing it as Turkey’s problem and no one else’s,” said Sean Callow, currency strategist at Westpac. “That seems to have changed.”
Analysts and investors attributed the relentless pressure on the Turkish currency to growing concerns about a large stock of loans denominated in dollars and other currencies, and discord between Washington and Ankara.
Turkey’s limited stash of currency reserves could prompt it to seek a bailout from the International Monetary Fund, said Paul McNamara, investment director for emerging market debt at GAM International Management.
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