ISTANBUL: Turkey's lira hit a record low of more than 4.0 to the dollar overnight as economic worries were compounded by investor fears of a global trade war, and lira weakness was seen as potentially adding pressure on the central bank to tighten policy further.
President Tayyip Erdogan's chief economic adviser Cemil Ertem told state broadcaster TRT Haber that the fall was not in line with Turkey's macroeconomic fundamentals and that levels beyond 3.85 to the dollar were speculative.
The lira rebounded in morning trade to stand at 3.9620 against the US currency at 0835 GMT, having slid to a record low of 4.0375 in illiquid trade overnight, well beyond the previous record of 3.98.
The lira also hit a record low against the euro , touching 4.9728 overnight.
The lira was hit as the yen rose amid talk of position unwinding by Japanese retail investors who had held long positions in higher-yielding currencies. The Turkish lira slid as much as 3 percent against the yen.
"Japanese investors rushed to close their yen/lira short positions," said Fatih Keresteci, of DNG Consultancy in Istanbul, adding that the lira was the biggest loser among emerging market currencies.
The benchmark 10-year bond yield rose to 12.73 percent from 12.42 percent in spot trade on Thursday. The main BIST 100 share index fell by 1 percent.
Overnight, US President Donald Trump announced long-promised tariffs on Chinese goods and China responded by saying it would fight to the end of any trade war.
Speaking at the Uludag economic summit in northwest Turkey, Deputy Prime Minister Mehmet Simsek said the loss in the lira's value was the main reason for the country's double-digit inflation.
Recent lira weakness has been driven both by inflation concerns and a widening of the current account deficit, which surged to $7.1 billion in January from $2.7 billion a year earlier.
The lira underperformed emerging market peers by 1 percent on Thursday due to worsening external imbalances and with global risk sentiment deteriorating due to the US tariffs on China, said BNP Paribas/TEB strategist Erkin Isik said
He forecast the lira weakness would push inflation higher if the lira level against a currency basket remains around its current 4.42 level.
"Recent TRY (lira) depreciation would add about 1 percentage point to headline inflation in the coming months, increasing the pressure on the CBRT (Turkish Central Bank) to take action," Isik said.
Earlier this month, the central bank kept interest rates steady and it said it would keep policy tight until price pressures eased. It will hold its next rate-setting meeting on April 25.
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