Turkish lira’s plunge sparks fears of contagion

Turkey’s lira looked set to continue its precipitous fall, with the currency quoted at unprecedented levels above 7 per dollar early Monday in Asia after the nation’s president showed no signs of backing down in a standoff with the US.

The currency has been battered amid anxiety over Turkey's worsening trade tensions with America, runaway inflation and one of the world's largest current-account deficits. It has tumbled more than 40 per cent this year and is the worst performer in 2018 among global currencies tracked by Bloomberg.

Bloomberg price data showed the dollar climbed as much as 13 per cent to 7.2362, although a limited number of banks appeared to be providing quotes in early trading and bid-ask spreads from most were at least 0.02 lira per dollar. The lira was quoted at 7.0997 per dollar at 7.10am in Sydney.

The currency has been a casualty of a deepening crisis spurred by the Turkish administration’s growth-at-all-costs agenda and a worsening spat with the US, which sanctioned Turkey over the detention of an American priest.

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The lira’s plunge and fears of a contagion sparked tremors through global markets, dragging a gauge for emerging-market currencies down on Friday by the most in more than a year.

The extended rout in the lira helped weigh on the euro and spur haven currencies higher in early Asia trading. The euro fell as much as 0.4 per cent against the dollar, and as much as 1 per cent versus the Swiss franc.

Against the yen it slid almost 1.6 per cent at one point. Liquid emerging market currencies also came under pressure with the Mexican peso and the South African rand registering drops of around 1 per cent.

The sell-off also represents a vote of no-confidence in a new system of government that earlier this year handed President Recep Tayyip Erdogan unrivaled authority, essentially paralyzing the bureaucracy in Ankara.

In speeches Sunday, Erdogan remained defiant, vowing never to give in on interest rates. He also ruled out an agreement with the International Monetary Fund.

“Rate hikes would not be enough, with Turkish officials needing to create a credibility shock,” Guillaume Tresca, senior emerging market strategist at Credit Agricole CIB, wrote in an August 10th note.

“A complete rebalancing of the economy is needed, with a new economic team and a real commitment to the central bank’s independence.”

Turkey’s central bank - which has raised its main policy rate to 17.75 per cent - unexpectedly refrained from a further hike at its last meeting. “Turkey’s problems will continue to mount in the face of excessively loose monetary and fiscal policy,” Capital Economics senior markets economist John Higgins wrote in an August 11th note.

Turkey’s government debt plummeted on Friday, driving the yield on 10-year debt to a record close of 22.11 per cent. Credit default swaps tied to Turkish government bonds also moved sharply higher wider.

Five-year contracts - the cost to insure the bonds against default - climbed 75 basis points to 453 basis points Friday evening in New York, the highest level since March 2009, CMA data showed. – Bloomberg