Turkish lira extends decline after gov't defends past policies

ISTANBUL: Turkey's lira declined 1% on Wednesday to its weakest level against the dollar in nearly three weeks, under pressure after the government's defence of former finance minister Berat Albayrak and speculation over his possible return to cabinet.

Dealers said the currency was underperforming emerging market peers, having outperformed them since November when Central Bank Governor Murat Uysal was replaced and Albayrak resigned.

The lira weakened as far as 7.1840 and stood at 7.17 against the US currency at 1200 GMT, compared to a close of 7.11 on Tuesday.

Dealers say this week's lira losses were triggered by President Tayyip Erdogan's defence of Albayrak, whose time in office coincided with a sharp slide in the lira. The central bank's FX reserves were also badly depleted due to a policy of state banks selling $130 billion to support the lira.

The lira had rallied more than 20% after Albayrak and Uysal departed, as investors expected tight monetary policy and a more orthodox approach after years of perceived mismanagement.

An official from Erdogan's AK Party said Albayrak's re-appointment as a cabinet minister had been the subject of recent discussion within the party.

"Some are sure that he will be appointed energy minister but Erdogan will decide. There are also those in the party that say this is not possible," the official told Reuters.

"I do not think that it is an option for him to become the economy minister again. He could be appointed to the cabinet or the party," he said, adding that the final decision could be made at the AK Party's national convention in the coming weeks.

Turks have bought hard currency as a hedge against inflation stuck in double digits in recent years, leaving them with record high levels of forex holdings.

Tim Ash of Bluebay Asset Management said the recent weakness showed the lira's vulnerability "as long as locals fail to de-dollarise."

"Therein the CBRT has likely just not done enough in terms of rate hikes - real rates are just not high enough given the inflation trend," he said.

Amid this week's lira weakness, the central bank raised reserve requirement ratios for lira deposits by 200 basis points.

It said the move would increase lira-denominated required reserves by approximately 25 billion lira ($3.5 billion), while total required reserves in FX and gold are expected to decrease by $500 million.

JPMorgan has told clients it was prudent to take profits on bullish bets on the lira given its recent rapid rise.