Turkey’s lira slumped 1.3% on Wednesday to a new record low of 9.875 against the US dollar. The greenback strengthened yesterday as official data showed strong US inflation, which triggered speculations over a possible earlier policy tightening by the Fed. Higher US interest rates typically pull funds from emerging economies, especially those with high foreign debt, such as Turkey. The currency has lost nearly 25% of its value this year, making it the worst performer among emerging markets.
Foreign investors have also scaled back exposure to Turkey over the past five years due to persistently red hot inflation and growing concerns about President Tayyip Erdogan’s influence over the central bank. The Central Bank of the Republic of Turkey has cut benchmark interest rates by 300 basis points since September and signalled further albeit smaller rate cuts in the coming months, which were deemed premature by many economists. Turkey now has negative real yields, a red flag for investors.
