Moody’s decision to assign a stable outlook on Turkey’s ratings in mid-May has brought the Turkish economy into the ‘Champions’ League,’ if one may say so. However, the dollar has also risen against the lira along with the upgrade
For almost a year, the exchange rate has hovered in the TL 1.78 – 1.80 range. In the two weeks after the credit upgrade, the dollar rose Kr 7 and stabilized at TL 1.84 – 1.86. So what will happen after this point? Why has the dollar been rising despite the rating upgrade? We will name the factors that influenced the increase in the dollar below, but it should be quickly noted that it is unlikely that the exchange rate will go back down to the TL 1.78 – 1.80 range any time soon. Bankers say the dollar might increase up to TL 1.90 and later recede back to TL 1.85- 1.87 and possibly remain around that level from then on.
CB supports dollar rise
One of the main reasons behind the rise in the dollar is the Turkish Lira losing its appeal with the Central Bank shaving off 1 point off the interest rate. With the rate cut, countries such as Brazil, Russia, India and Chile started offering better yields for investors. In addition to this, the general trend in the dollar strengthening against all major currencies is also contributing to its increase in the exchange rate. Another pressure point on the exchange rate is dividend payments by İstanbul Stock Exchange (İMKB) companies to their foreign shareholders as about USD 5 billion are expected to leave the country after these payments. The rise in the dollar and the foreign currency basket is making the Central Bank happy, as at this time of global currency wars in which a lower exchange rate hurts export data, Turkish exporters are struggling to compete in the global market. This is why the Central Bank is not intervening, to the contrary even supporting, the rise in the exchange rate.
China manufacturing shrinks for first time in 7 months
Data from China indicating a slow-down in the country’s factory activity and statements from the FED have upset the markets and also stand as indicators showing that the dollar’s steam will not cool down for some time.
Federal Reserve Chairman Ben Bernanke announced that an early decision to slow down on quantitative easing can have negative consequences. He said that any move to adjust asset purchases would depend on the economic data. Bad news from China is also likely to influence the economy and world trade negatively. China’s Purchasing Managers’ Index (PMI) for May fell to its lowest since September. The relative strength of Asian economies compared to the general weakness in the global economy has always been reason for hope for investors and the data from China was enough to upset those hopes. There were sharp drops in commodity prices such as in the price of crude and copper, and gold prices soared. Another risk factor is a possible failure of Japan’s risky monetary policy. These factors also strengthen the expectation that the dollar’s climb will continue.
