The US Dollar to Turkish Lira weakens to record lows at 9.8595 with lower interest rates, high inflation, and the order to expel the US ambassadors.
Inflation is moving high, but Turkeyâ€™s central bank (CBRT) has cut 200 basis points in its policy rate.
The Lira fell to a record low, trading at 9.85 levels on Monday. The US Dollar to Turkish Lira recovered to 9.52 levels on Tuesday, October 26, after Turkey reversed its threat to expel the foreign ambassadors.
The Dollar to Lira has gone down 24% so far, in 2021. The Lira has been declining since September. When other countries are bringing a hike in policy rates, Turkey is the only country lowering interest rates.
Interest Rate Cut by 200 Basis Points
The Central Bank of Turkey cut interest rates by 200 bps in its October meeting to 16%. Though markets expected a 50 bps cut, the central bank cut rates by 200 bps. In September, the country saw a 100 bps rate cut.
Erdogan believes that cutting down interest rates will reduce inflation. However, economists feel that it is an unconventional belief by President Erdogan. Low-interest rates will not bring down inflation but will weaken the US Dollar to Lira further. Political interference is driving the Lira lower.
Inflation is at 19% in Turkey, much above the expected 5% mid-point target. It has been the chief cause of the depreciation in the Lira.
Money credibility is also depleting after the coronavirus pandemic. Food inflation is hitting families who are already reeling under income loss caused by the pandemic.
Despite high inflation, the president is lowering the policy rate, driving the Lira downwards, say opposition leaders. The hawkish policy by Erdogan to cut down interest rates is worrying investors in the forex market. Foreign investors are moving their investments out of the Lira as it continues to fall relentlessly. The decision to lower rates is bad for the economy, which will bring down their investment value, say foreign investors in Turkey.
The government lifted three central bank governors when they tried to hike interest rates. Sahap Kavcioglu is the current governor of the central bank of Turkey. Under his governance, interest rates have come down by 200 basis points, triggering a further slide in the USD/TRY currency pair in the foreign exchange market. President Erdogan insists on lowering interest rates, and the central governors have to go according to his wishes.
Turkish Dollar to US Dollar conversion is at 0.105465 on Tuesday, October 26.
President Orders Expulsion of US Ambassadors
Turkish President Recep Tayyip Erdogan asked his foreign ministry to expel the US ambassadors and ambassadors from nine other countries. Human rights activist and philanthropist Osman Kavala has been under custody for almost four years, and the ambassadors supported the release of the philanthropist. The ten ambassadors made a joint appeal for the release of the activist, Kavala, on Saturday.
Erdogan says that foreign ambassadors do not have the right to interfere in the domestic affairs of Turkey. He expelled all the ambassadors of the West, asking them to leave the Turkish border within 48 to 72 hours. Erdogan demanded the application of â€śpersona non grataâ€ť to the US ambassadors.
As tension between Turkey and the West escalates, it adds pressure on the Lira, lowering it to new lows. Erdogan threatened to expel ambassadors from the US, France, Canada, Denmark, Germany, Finland, Sweden, Norway, the Netherlands, and New Zealand. If the president expels the ambassadors, it may lead to friction between Turkey and the Western countries. It is an expensive game that threatens the safety of the country, say analysts.
Turkeyâ€™s Dollar bonds went lower on Monday after the negative remarks from the president. However, on Monday, October 25, Erdogan made an attempt to withdraw his comments of declaring â€śpersona non grataâ€ť on the ambassadors. The currency pair saw a marginal recovery after Erdogan softened up.
Inflation Hits Economic Development in Turkey
The manufacturing confidence index has come down from 114.8 in July 2021 to 109.6 in October. Business sentiment took a blow with output, employment, and export orders coming down. The weaker Lira is not able to attract foreign investment.
The unemployment rate remains unchanged at 12.1% in August 2021. The job support programs are coming to an end, bringing down job opportunities. Employment level came down by 14 thousand.
The employment rate decreased in August to 45% from July figures at 45.10.
Energy prices are increasing, which adds pressure on the Lira. High crude prices are pushing up the cost burden on the people, as it hits the cost price of commodities, travel, and household expenses.
Foreign investors are selling their investment in the Lira, disturbed by the decline in the US Dollar to the Turkish Lira in the forex market. It is now up to the local forex investors to determine the direction of the Lira in the days to come, say experts.
The US Dollar Index took support at the 93.50 area, trading at 93.880 levels on Tuesday, October 26. The DXY remains positive above support levels at 93.76 in the foreign currency exchange.