Currencies: Turkish lira rebounds off historic lows against major currencies

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A Turkish bounce for the lira

The Turkish lira staged a broad rally against its major counterparts Tuesday following an intense few sessions of unraveling that has sparked concerns of economic contagion.

Most recently, the Turkish lira USDTRY, -4.5260%  was up sharply against the dollar and the euro EURTRY, -4.5725% One dollar bought 6.5327 lira, from 6.8846 late Monday in New York, a gain of nearly 5% for lira. Meanwhile, a euro bought 7.4940 lira, versus 7.9079 lira in the previous session.

On Monday, the Central Bank of the Republic of Turkey introduced measures to boost liquidity in the market, but investors appeared to brush off those efforts, remaining concerned that country’s economic health under President Recep Tayyip Erdogan remains in question. The autocratic leader has placed blame for Turkey’s plunging lira on the U.S., which has imposed sanctions against the nation for its detention of evangelical pastor Andrew Brunson.

Over the weekend, a defiant Erdogan said he had no intention of hiking rates in the country, something that economists and critics feel is needed to alleviate pressures from the rapidly declining currency. The Turkish president also blamed “economic terrorists on social media” for disseminating alleged disinformation about the state of Turkey’s economic condition, during Monday speeches.

The Turkish lira has lost a third of its value in August alone against the U.S. dollar and has declined by about 73% against the currency thus far this year.

Check out: Strategists see 4 ways out of Turkey’s currency crisis

Meanwhile, the dollar, as measured by the ICE U.S. Dollar Index DXY, -0.03% a gauge of the buck against a half-dozen currencies but not including Turkish lira, was flat on the day, holding mostly steady after reaching a nearly 14-month peak in recent days.

The gauge stands at 96.3800. A broader-based dollar index, the WSJ Dollar Index BUXX, -0.18% which measures the buck’s strength against 16 rivals including the lira, was down 0.1% on the session.

Emerging-market currencies, which had fallen in sympathy with the Turkish lira as investors feared a spillover, also have moderated losses and turned higher.

The South African rand USDZAR, -2.2392% and Mexican peso USDMXN, -1.2398%  were both strengthening on the day, with one dollar fetching 14.1294 rand versus 14.4201 late Monday, and 18.9657 Mexican pesos versus 19.1161 a day earlier.

Although concerns that Turkey’s problems could portend difficulties brewing across the complex of EM currencies, which tend to maintain high dollar-denominated debts, others suggest that Ankara’s woes, including inflation and an autocratic leader, are more country specific.

“We don’t doubt that some, or even many of these problems can be found in other countries but, for the most part, we think the problems are pretty specific to Turkey. Perhaps the only one that might require monitoring is the external borrowing issue as US rates rise and the dollar strengthens,” wrote Steven Barrow, currency and fixed-income strategist at Standard Bank in a Tuesday research note.

Countries that maintain a significant amount of debts denominated in dollars and that use local currencies to service those obligations can run into troubles when the greenback’s value escalates rapidly.

Emerging markets have been a focus of concern for investors this year because after declining by 10% last year, the dollar index has advanced by 4.6% in the first eight months of 2018. Moreover, the Federal Reserve is expected to increase rates twice more before the end of the year, perhaps providing a further boost to greenback in a climate where few other countries are tightening monetary policy as aggressively.

Meanwhile, the euro EURUSD, -0.0526%  edged down to $1.1389, compared with $1.1411 late Monday, a decline of about 0.2% against the buck and the British pound GBPUSD, +0.0783%   gained slightly, with one dollar buying $1.2781, compared with $1.2766.

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