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Turkey’s Currency Gets Carved Up


Image source: Wikimedia Commons

What's going on?

On Friday, the value of Turkey’s currency – the lira – fell to new lows against the US dollar after the US announced further tariffs on Turkish imports.

What does this mean?

Turkey’s been cooked through: the country’s inflation is three times higher than the central bank’s target (i.e. Turkish consumers’ money can buy increasingly fewer things) [tweet this]. Interest rates are also high, but arguably not high enough – since raising them typically reins in inflation. Investors have been fleeing with their cash and selling the lira (as well as Turkish stocks and bonds), sending the value of the currency lower (and the value of stocks, too).

A recent flare-up in political tensions between Turkey and the US culminated in the latter doubling the tariffs on imports of steel and aluminum from the former. Sometimes when a country’s currency loses value, this can be offset by higher demand for its products from foreign buyers (as they’re relatively cheaper) – but seeing as the higher tariffs will make Turkish metals more expensive, that doesn’t look likely.

Why should I care?

For markets: Emerging markets often move in sync.

As the value of the lira falls, Turkish companies that have borrowed money in dollars will find their debts have ballooned (as it’ll cost more lira per dollar of debt), reducing the chance that foreign lenders will ever be paid back (which isn’t exactly enticing to investors). Separately, investors tend to group countries with similar characteristics together – so other emerging market currencies like the South African rand and Mexican peso fell in value, too.

The bigger picture: The US amped up sanctions on Russia.

Russia’s another emerging market that’s reeling from strained relations with the US. Last week, the US announced further sanctions on Russia, which could affect hundreds of millions of dollars worth of trade. Investors sold stocks of Russian companies that might be impacted and traded in their rubles for “safer” currencies like dollars and yen.

Originally posted as part of the Finimize daily email.

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