Why Turkish Lira Collapse Over?

August 20, 2018

Turkish lira fell by as much as 11% against the U.S. dollar Monday morning, continuing a slide that started to alarm markets late last week. The lira’s fall is now starting to take other emerging markets’ currencies with it, and there are now fears for European banks, too.

 

 

 

 The lira has lost around half its value against the dollar over the past year, and most of that is since the start of this year. Turkey’s private-sector debt is high—with much of it fueled by foreign money—and so is inflation, at an annual rate of 15.9% this month. Meanwhile, President Recep Tayyip Erdogan insists on maintaining low interest rates despite criticism from financial experts.

A lot of forex analysts and traders are now wondering if the collapse in the Turkish Lira is over, or if another round of selling is around the corner. The Turkish currency has been losing value against the US Dollar and the Euro for since August of 2017. The reason was the economic policy which Turkey embraced. This resulted in Turkish companies borrowing heavily in foreign currencies and made Turkey heavily dependent of foreign capital inflows, creating one of the world’s worst current account deficits.

Tensions between the two NATO allies surged over the detention of American pastor Andrew Brunson, who is currently under house arrest. He has been accused of espionage and terrorism relating to the failed coup attemptin 2016. Turkey stated that the coup was organized by Turkish business man and cleric Fethullah Gulen who resides in the US. His so called Gulen Movement is designated as a terrorist organization by Turkey who called on the US to extradite him in order to face charges. The US has refused to comply with Turkey’s request so far and Gulen denies any involvement.

 

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