Published: Sat, August 11, 2018
Global News | By Stacy Ballard

Turkish lira slumps to new record low as Donald Trump doubles tariffs

Turkish lira slumps to new record low as Donald Trump doubles tariffs

New Finance Minister Berat Albayrak - Erdogan's son-in-law - rolled out the government's new economic plan on Friday, promising central bank independence and tighter budget discipline, but giving few details to reassure investors.

Deteriorating ties between the USA and Turkey - both North Atlantic Treaty Organisation members - have also alarmed investors.

That indicates that people are buying dollars and euros, not selling them off - and that they're not finding buyers in lira, anyway.

What Are the Government's Options?

Trump has described Brunson's detention as a "total disgrace" and urged Erdogan to free him "immediately". Municipal elections are not until April 2019.

Investors are concerned with Erdogan's firm grip on Turkish monetary policy.

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Turkey's woes also shook world markets, pushing down stock indexes.

"The surge in Turkish inflation, bond yields and the even more dramatic plunge in Turkey's exchange rate in 2018 suggest that the country could now be in danger of heading for a bust", Berenberg economist Carsten Hesse said. He has also promised to narrow Turkey's current account deficit. The president, after all, chose a family member to head this influential position for a reason.

Will Diplomatic Tensions Heighten the Currency Challenge?

Both currencies added to losses after U.S. President Donald Trump said he had authorized a doubling of tariffs on steel and aluminum imports from Turkey.

"I have just authorised 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!"

Erdogan's nationalist campaign and Trump's "America First" policy clash perfectly.

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He also said it was wrong of the USA to try to bring Turkey into line with threats, a day after Trump doubled tariffs on steel and aluminium imports from Turkey. Following the tweet, Turkey responded by imposing duties on $1.8 billion in USA goods including coal and paper. Overnight it had retreated to its lowest since November 2016 on threats of new US sanctions, weakening beyond the psychologically important 65-per-dollar threshold.

Mr Erdogan said although the nations had been allies for decades, Turkey "now has alternatives". He claims higher rates lead to higher inflation - the opposite of what standard economic theory says. The weakened currency's value has helped increase inflation and anxious worldwide investors. Erdogan could also entertain help from Qatar, but the benefits of such aid from Doha would be limited.

That turned into a rout on Friday, with the lira diving more than 18 percent on the day and more than 40 percent this year to a new record low after Trump took steps to punish Turkey in a wide-ranging dispute. This is coming to a head as a much-needed demand slowdown is causing asset quality problems in the banks.

"When it comes to cornering Turkey to extract certain concessions that undermine our sovereign rights, it is a whole another story".

Turkish newspaper Hurriyet and other media reports quote Erdogan as making the comment to a group of worshippers following traditional Muslim Friday prayers during a visit to the northern city of Bayburt. And it is not too far away from the level at which Goldman Sachs warned Turkey's banks would run out of the extra capital they had built up as a buffer against a crisis.

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