As it is global stocks are feeling the pinch of escalating trade tensions between the United States and China, and now the collapse in Turkish lira has amplified the concerns. This is especially true as Turkish lira is in a free-fall territory, nosediving as much as 11% against the dollar in early trading today after plummeting more than 20% on Friday.
With the latest slide, the lira is down around 45% against the dollar since the start of the year and has hit its lowest level since 2001.
What Happened?
The slump came on the back of worries about President Tayyip Erdogan’s influence over monetary policy and a worsening U.S. relationship. The Turkish economy is suffering myriad woes, including double-digit inflation, inadequate currency reserves and one of the largest current-account deficits in emerging markets. Persistent concerns over economic stability and the Turkish government’s lack of action to tackle the problems plaguing its economy has taken a toll on its currency.
In particular, Erdogan’s preference to keep interest rates low even though inflation is more than three times the central bank’s target has foiled economic conditions. The crisis intensified after U.S. sanctions over a detained American pastor and now Trump’s doubling down import tariffs on steel and aluminum metals has made the situation worse.
The breakdown of Turkish lira has made it harder for Turkish companies to pay back loans they have taken in the U.S. currency. If the troubles continue, many economists have warned that Turkey could slip into a recession and the debt crisis would require a bailout from the International Monetary Fund.
Market Impact
The contagion has been spreading across the global market with other emerging currencies bearing the brunt of the lira’s downward spiral. The South African rand hit a low level not seen since mid-2016, the Russian roble slumped again and the Indian rupee slid to an all-time trough. Investors are also fearing that the country’s financial crisis could hit the European markets as well.
