Battered Turkish lira gains on report of Turkish-US talks

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ISTANBUL (Aug 7): The Turkish lira gained nearly 2% early on Tuesday but remained close to a record low struck the previous day after broadcaster CNN Turk said Turkish officials would go to Washington to discuss strained relations.

On Monday, it fell as much as 5.5% to 5.4250 against the US dollar, an all-time low and its biggest intraday drop in nearly a decade, after the Trump administration said it was reviewing access for Turkey's exports to the US market.

The depth of the sell-off reflects growing concern about monetary policy under President Tayyip Erdogan and worsening ties with the United States.

A delegation of Turkish officials will head to Washington in two days to discuss an ongoing row between the NATO allies, broadcaster CNN Turk reported overnight, citing diplomatic sources.

Ankara and Washington had reached pre-agreements on certain issues, it said, without elaborating. The US State Department did not respond to a request for comment and Turkish officials were not immediately available for comment.

Relations between the two countries have been strained by differences over Syria and the trial in Turkey of US evangelical Christian pastor Andrew Brunson.

Brunson, who has lived in Turkey for more than two decades, is charged with supporting the group Ankara blames for an attempted coup in 2016. He denies the charge.

Over the weekend, the US Trade Representative said it was reviewing Turkey's duty-free access to the US market, after Ankara imposed retaliatory tariffs on US goods in response to American tariffs on steel and aluminium. The move could affect US$1.7 billion of Turkish exports.

"Turkey is going through its first currency crisis of the floating era," Harvard economist Dani Rodrik wrote on Twitter.

"All the previous ones were when the rate was fixed or managed, and hence unfolded much more quickly. This one is stretched over time, and the government prefers to ignore it."

The lira, which has lost more than 27% of its value this year, was trading at 5.2484 to the dollar as of 0829 GMT.


Erdogan, who has previously cast lira selling as the work of Western financiers attempting to bring Turkey to its knees, has been notably quiet about the crisis this time around. Last week, he called on Turks to convert hard currency and gold into lira and said Turkey would turn to Chinese markets for financing.

On Tuesday, local media made little mention of the currency crisis, with almost none of more than 20 mainstream newspapers mentioning the sell-off. It made headlines of some opposition newspapers and the main business paper.

To prop up the currency, the central bank cut the upper limit of banks' reserve requirements, a move it said would provide lenders with US$2.2 billion of liquidity.

But that had limited impact on the lira, and some market observers said it had only served to undermine confidence in the central bank. Concerns about central bank independence as Erdogan seeks greater control over monetary policy have driven lira losses this year and last.

"In an environment where the market expects an interest rate hike, the central bank only changed reserve requirements. The lira plunged as markets got the impression that the central bank has problems hiking rates," said economist Mahfi Egilmez on Twitter.

"It would have been better if they did not change the reserve requirements at all."

The currency sell-off has also sharpened investor concern about the outlook for Turkish companies. They have for years borrowed in hard currency, drawn by lower interest rates, but the lira crisis has made it more expensive to repay that debt.

Credit ratings agency Moody's has predicted problem loans will rise to well above 4% in the next 12-18 months, from 2.9% from May, which would also be costly for banks.

As of May, Turkish companies had US$222.8 billion in long-term loans from abroad, almost all of that in dollars or euros, central bank data shows.

Turkish stocks were up 1%. The BIST index of blue-chip stocks is down 40% in dollar terms this year and is the second-worst performer of some 30 emerging market stock indices, according to Thomson Reuters data.

Only Venezuelan stocks have performed worse in dollar terms.