Turkish lira hits record low on geopolitical concerns

ISTANBUL: Turkey's lira weakened to a record low against the dollar on Friday, as concerns persisted over the Caucasus conflict, possible US sanctions, and tensions between Ankara and the European Union.

It then firmed to 7.9125 by 0721 GMT, after the central bank raised the interest rate in the swap market to 11.75pc from 10.25pc. The currency closed at 7.9420 on Thursday.

The lira has lost around 25pc of its value this year, mainly on concerns over the central bank's depleted forex reserves and costly interventions in the currency market. Geopolitical worries have also recently come to the fore.

Turkey's backing for Azerbaijan in a conflict with Armenian forces in Nagorno-Karabakh has caused unease, while EU-Turkey tensions have also flared up again.

A Republican and a Democratic US senator have called for President Donald Trump's administration to impose sanctions on Turkey over its purchase of Russia's S-400 defence systems after a report Turkey may be planning a major test.

Piotr Matys, senior emerging markets forex strategist at Rabobank, said good relations between Trump and President Tayyip Erdogan have so far prevented the worst case scenario of punitive measures against Ankara.

"If President Trump is not re-elected, the selling pressure on the lira is unlikely to fade even if Armenia and Azerbaijan announce a ceasefire," he said in a note, adding possible further lira depreciation could put pressure on the central bank to act at its rate-setting meeting later this month.

The bank unexpectedly hiked its policy rate by 200 basis points to 10.25pc in September. It has also funded the market at a higher rate, raising the average cost of funding to 11.56pc.

A parliamentary commission on Thursday approved a doubling of the Treasury's borrowing limit for this year, state-owned Anadolu agency reported, after Ankara raised its budget deficit forecast for the year.

Concerns over the reliability of economic data in Turkey, including inflation and growth, resurfaced recently after reports that a former head of the Turkish Statistical Institute - now an opposition politician - said he didn't trust the numbers.