The Turkish Lira is depreciating. What is going on? We go on a small track search, and begin on last Thursday. The Turkish central bank lowered the key interest rate from 14% to 12%, with the market expecting a reduction to 12.5%. In just a few months, the central bank cut the key rate four times, from 24% to 12%.
Against the normal market logic, the Turkish Lira was even able to appreciate slightly. USD vs Lira fell from 5.79 to 5.77 by the next day. And from then on, the Dollar went up against the Lira to 5.85 today, Monday. Meanwhile, there was positive news from the U.S. trade war with China, which helped the U.S. Dollar. The Dollar Index has not profited as much in recent days because the US Dollar is also traded against the British Pound in this currency basket. And the Pound went through the roof after Boris Johnson’s election victory in the UK. That’s why the currency basket has the effect that the US Dollar has not been particularly strong in recent days.
Turkish Lira devalues because of Erdogan statements
But against the Turkish Lira we can see the strength of the US Dollar. The most important argument why the Lira is currently showing weakness is probably of a political nature. According to recent reports, President Erdogan has threatened the USA with closing the Incirlik air base used by the USA. It concerns possible US sanctions against Turkey. It also concerns a possible reaction of Turkey to the recognition of the Armenian genocide in the First World War by the US Senate. Incirlik lies in the southeast of Turkey. From there the US is able to reach countries like Syria, Iraq etc. in a very short time. We can quickly imagine how strategically important this base is for the US military in terms of Middle East geostrategy.
We had already mentioned Incirlik several times in recent months as a possible reason why Donald Trump had touched Turkey with gloves when threatening sanctions. There was, for example, the Turkish invasion of Syria, and the Turkish missile purchase in Russia. It had hit the US hard. There were no really solid sanctions. Probably because the Pentagon knows only too well that Erdogan has this base as an ace. The threat of Erdogan brings movement to the currency market. When there is uncertainty, there is always a pull towards the “safe” US Dollar.
The following chart shows the development of US Dollar vs. Turkish Lira in the last 30 days. The depreciation of the Lira continues, albeit in small steps, but noticeably. The second chart shows the trend in the large picture since the end of 2018. The trend is rising for the US Dollar, and thus falling for the Lira. Weak economic data and a renewed rise in inflation in Turkey could lead to a further depreciation of the Lira.