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11 August 2018, 06:24 | Kelvin Horton
A financial shockwave ripped through Turkey on Friday as its currency nosedived on concerns about its economic policies and a dispute with the USA, which President Donald Trump stoked further with a promise to double tariffs on the North Atlantic Treaty Organisation ally.
"The last time I can remember a currency exploding into a similar acceleration of weakness to what we have seen in the past 24 hours is the Russian rouble crisis that transpired late in 2014", said Jameel Ahmad, head of currency strategy at FXTM. Together, that can weigh on the currency. To do that, they have to sell lira - worsening the rout.
Trump's announcement came less than an hour after Turkish President Tayyip Erdogan urged Turks to help defend the country against what he called economic war against the country. The central bank is next scheduled to meet on September 13. The predictable result is this has made inflation get out of control - it is up to 15.9 percent when they are supposedly trying to keep it to 5 percent - because the central bank has been so slow to raise rates, and, in fact, refused to do so at its most recent meeting.
Image: Donald Trump claimed 'relations with Turkey are not good at this time!' That drained investor confidence in the central bank, leading to a further sell-off of the currency. He said this would be Turkey's response "to those who wage economic war against us".
He also urged Trump to recognize the 1915 Turkish slaughter and exile of 1.5 million Armenians as a genocide, which US presidents have declined to do for decades.
Already, U.S. -Turkey relations have been strained over an array of conflicts.
Trump tweeted that he had authorized the doubling of steel and aluminumtariffs "with respect to Turkey". The fall of the lira has accelerated dramatically in 2018, but Friday's one-day collapse far eclipsed any previous slide. Further downside for the lira and weakness in domestic bank bonds could accelerate the withdrawal of wholesale funding in an economy which needs to attract overseas capital.
Aside from the impact a potential Turkish debt crisis may have on European markets and financial institutions, which could have a rippling effect on other global markets, the falling lira also matters because it helps to further depress an already-weakened euro and further strengthen the US dollar, which has been rising sharply for much of this year.
A stronger dollar has also put more pressure on the currency. "Look at what we were 16 years ago and look at us now", Erdogan told supporters.
Specifically, he said, Europeans worry that turmoil in Turkey could reactivate the kind of refugee crisis that beleaguered the continent in 2015.
The Canadian dollar weakened to a more-than two-week low against its US counterpart as geopolitical risk rattled global financial markets, offsetting stronger-than-expected domestic jobs data. The White House said he had authorized them under Section 232 of USA trade law, which allows for tariffs on national security grounds. Any resumption of serious migrant flows from Turkey would be a big political issue in Europe, where opposition to immigration has fueled the rise of right-wing parties such as Itay's League and the Alternative for Germany. A 20 percent fall in exports would only reduce GDP by 0.1 percentage point or less per year in the 19 countries that use the euro currency.
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