Dollar hits 13-year high

Additionally, most emerging market currencies have recovered to a certain extent after the initial hike of the dollar, but not the lira, which also confirms this analysis. For example, following Trump’s election victory the rate rose to TL 3.25 from TL 3.11, but then balanced out at around TL 3.20. However, a short while after that, increased domestic tension and statements from politicians indicating that Turkey might be burning bridges with the EU triggered concern. At this point, FX fluctuations are now decided more by panicky response than by market forces. The lira’s significant negative differentiation in comparison with emerging market currencies call for lesser emphasis on external factors while commenting on the economy.
Rate hike since start of the year
The increase in the dollar since the year’s start has reached 18 percent. As authorities fail to take timely measures against this emerging picture, the rise of the dollar turns into a self-driving cycle, bankers warn. Here’s how this comes about: the loss of value in the lira causes costs to increase which in turn leads to inflationary pressures; and the expectation of high inflation feeds the expectation of higher real interest rates; and these expectations not being met lead to further losses in the lira… Banking professionals note that in order to stop this cycle, an aggressive policy of rate increases is the only viable option. Bankers have likened the latest situation in the economy to driving downhill in a truck with no brakes, saying that the failure to place a chock in front of the wheels at this time might lead to “fatal risks” in the near future.
Central Bank needs to take serious measures
The Turkish Central Bank’s unexpected 50 basis point interest-rate increase on Nov. 24 provided only a fleeting respite for the lira, as the effect dissipated due to the European Parliament vote to suspend talks with Turkey as well as due to criticism leveled at the Central Bank by Turkish politicians after its rate increase. An announcement from Prime Minister Binali Yıldırım that the next elections will be held in 2019 and that Turkey will start commissioning tenders in lira from this point onward have been taken positively by the markets, according to banking professionals, who, however note that these are not nearly enough to reverse the negative picture that has appeared in the FX market. According to bankers, tensions with the European Union, coupled with more news of deaths of Turkish soldiers in Syria and increasing geopolitical risks, an upcoming referendum and the selling pressure abroad offer an explanation for the harsh instability in the rate. Analysts say that if the Central Bank — which has come under stern criticism from politicians for its recent increase– fails to go for a seriously harsher rate increase, it will be impossible to stop the climb of the dollar.