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What is happening with the Turkish lira?
Turkish lira made a spectacular decline during the recent trading days. USD/TRY came close to 5.00. It looks like it will be the worst month for the Turkish currency since the global financial crisis of 2008. Since the start of 2018, TRY fell by more than 20% versus the US dollar. Notice that the lira crashed against the euro as well: EUR/TRY reached 5.76.
The reasons for the lira's fall
The main reason why the TRY collapsed because of statements of President Recep Tayyip Erdogan. Erdogan said on Tuesday that he wanted to take more responsibility for monetary policy in the country after his expected re-election on June 24. It means that the President wants to completely diminish the role of the country’s central bank. In his opinion, interest rates in Turkey should be lower, and lower rates, in turn, represent a negative factor for the TRY.
Erdogan's desire to keep rates low can make Turkey face serious economic problems. High oil prices hurt the economy. Turkish inflation exceeds 10%. Investors’ confidence in the country is already very low. High risks make them turn away from Turkish assets to other markets. The world’s top ratings agencies already expressed concerns with the situation.
Forecasts for USD/TRY
It’s clear that the overall uptrend in USD/TRY will continue in the medium term. The US dollar is rising not only versus the lira but against other currencies as well.
At the same time, the crash of the lira made the Central Bank of the Republic of Turkey hold an extraordinary meeting and raise interest rates even before the next meeting June 7. The regulator raised rates by 300 basis points.
Turkish central bank had to call an emergency meeting and raise interest rates
USD/TRY reacted to the news and finally started declining. The pair’s overbought on all timeframes and may temporarily slide lower. Support is at 4.50. To restore confidence in the lira, the country’s officials should also make some encouraging comments to calm down the market.
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