The plunge in the Turkish lira could not have come at a worse time. As the currency continued to fall, United States President Donald Trump announced on Friday he had doubled steel and aluminum tariffs on his NATO ally before admitting that relations between Washington and Ankara were “not very good.”
The decision was made as tensions mount between the two nations over the imprisonment of Andrew Brunson, a 50-year-old evangelical pastor, and other diplomatic issues.
“The last time I can remember a currency exploding into a similar acceleration of weakness to what we have seen in the past 24 hours is the Russian ruble crisis that transpired late in 2014,” Jameel Ahmad, the head of currency strategy at FXTM, said.
But President Recep Tayyip Erdogan, who had remained unusually silent until the lira crisis deepened, urged his fellow countrymen to take matters into their own hands.
“If you have dollars, euros or gold under your pillow, go to banks to exchange them for the Turkish lira. It is a national fight,” he said. “This will be the response to those who have declared an economic war.”
With the currency diving, Trump authorized higher tariffs on Turkish imports on aluminum and steel of 20% and 50% respectively.
“I have just authorized a doubling of tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong dollar!” Trump said in a post on Twitter. “Aluminum will now be 20% and steel 50%. Our relations with Turkey are not good at this time!”
Markets have been deeply concerned about the direction of domestic economic policy under Erdogan with inflation hovering around 16% as the central bank refuses to raise interest rates in response.
Gyorgy Kovacs, the chief economist for EMEA emerging markets at UBS, pointed out that a massive rate hike of between 350 to 400 basis points would be “consistent with real rate levels that in the past helped to stabilize the currency.”
But that does not appear to be on the table as Erdogan pursues low rates to keep growth humming.
After winning a June election with revamped powers, he tightened his control over the central bank and appointed his son-in-law Berat Albayrak to head a newly-empowered finance ministry.
“President Erdogan’s strengthened powers under the new presidential system have made it increasingly uncertain whether policymakers will be able to act to stabilize the economy,” William Jackson, the chief emerging markets economist at Capital Economics in London, said.
– additional reporting AFP