Turkish Lira Approaches Record Low on Chill in Turkey-US Relations

Turkish Lira fell lower in early trading on Monday, as relations with the US have settled on a firm chill note, and the new central bank chief signalled that rate hikes would harm the economy.

Turkey’s currency has not done well so far this year, being one of the worst performers in emerging markets. 

"Market negativity is intense. (The) risk of an overshooting episode is unfortunately elevated”, Robin Brooks, chief economist at the Institute of International Finance, comments.

The Lira has further shed 3.5% in the last three trading days as it became clear that the US would officially recognise the 1915 massacres of Armenians in the Ottoman Empire as a genocide. Turkey strongly opposed the White House's decision, saying it undermined trust and friendship.

Of course there’s more at stake here than friendship. The Turkish currency is extremely sensitive to strains in relations with Washingon given past fallout from US sanctions and economic threats, including a spat in 2018 with President Donald Trump that caused a lira crisis and recession.

President  Erdogan's spokesman and adviser - Ibrahim Kalin, told Reuters that Washington should act responsibly since it was in no one's interest to "artificially undermine ongoing relationships for narrow political agendas. Everything that we conduct with the United States will be under the spell of this very unfortunate statementEverything that we conduct with the United States will be under the spell of this very unfortunate statement.“

Additionally, the new Central Bank Governor - Sahap Kavcioglu (appointed a month ago) commented late Friday that while he would keep monetary policy tight for now, any rate hike would send a bad message for the real economy.

All in all, the Lira has been in a fall for the past six straight trading days.

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