Turkish lira slides 2.7pc against dollar, nearing record low

ISTANBUL: The Turkish lira hit a record low against the euro and neared an all-time dollar low on Thursday, extending sharp losses from a day earlier as analysts warned of inflation and predicted state efforts to stabilize the currency could fizzle.

The lira tumbled 2.7pc to 7.25 against the dollar, having closed at 7.0550 on Wednesday. It has lost 18pc against the US currency this year despite the dollar's weakness in recent weeks.

It also touched a record of 8.5891 versus the euro, surpassing a low hit last week and bringing its losses against the currency to 13pc since the start of June. Non-commodity imports are often euro-denominated, raising an inflation risk for Turkey.

"The causes of the depreciation pressure are mainly of a fundamental nature: the fact that the central bank is not fighting inflation hard enough and extremely negative real interest rates," said Commerzbank FX and EM strategist Antje Praefcke.

"We therefore assume the lira will tend to remain under pressure," she added. Implied volatility gauges climbed and the one-week measure hit a three-month high.

Annual consumer price inflation stood at 11.76pc in July, while the central bank's policy rate is 8.25pc, leaving real interest rates negative for lira depositors.

On the back of low interest rates, cheap loans have led to a surge in house sales as the government seeks to revive an economy which like elsewhere has been hit hard by measures to combat the spread of the coronavirus.

The number of home sale transactions involving loans surged 1000pc year-on-year in July to more than 141,000, the urbanisation ministry was reported as saying by state-owned Anadolu news agency.

Asked what could ease concerns surrounding the lira, a treasury department official at one bank told Reuters there were three scenarios, with the least likely being a rise in global risk appetite.

"The second possibility is giving up on negative interest rates, but this is not at all easy as we are a country which does not like interest rates politically. We do not anticipate a rate hike unless there is no other option," he said.

The third possibility would be creating new forex inflows, whether through broadening swap agreements or IMF funding, while the government's statements indicate it will not consider capital controls, he added.

Istanbul's main share index fell 1.78pc.