ANKARA: The Turkish currency came under pressure yesterday despite the central bank hiking a key short-term interest rate to staunch the outflow of funds as investors reposition themselves for reduced US stimulus.
The lira fell to 1.9714 to the dollar to near a 12-month low from 1.9492 at the close on Tuesday, when the central bank raised its overnight rate by half a point to 7.75 percent.
The lira has fallen by about 10 percent since February, when it was at a 12-month peak of 1.7460 lira to the dollar.
But it is still slightly above a 12-month low of 1.9740 lira to the dollar set in early July, forcing the central bank to take urgent measures.
The central bank’s decision to raise its overnight rate follows recent intervention to defend the lira and is the latest sign of turmoil in emerging markets as the US Federal Reserve gets set to start winding down its stimulus measures.
With the US economy showing increasing signs of strength, many analysts say the Fed will start cutting down on its $85bn-a-month stimulus scheme next month.
Expectations of such a move have seen foreign investors in recent months repatriate some of the vast sums that poured into emerging economies when the Fed launched its latest stimulus programme last September, providing a boost to their currencies and equities.
In a written statement on Wednesday, central bank governor Erdem Basci said: “The additional monetary tightening will be maintained every day until further notice.”
Basci also said the bank would sell a minimum of $100m in foreign exchange auctions.
“As of today, a minimum of $100m will be sold at 1630 local time (1330 GMT) on days when additional monetary tightening is applied,” he said.
In July, when the lira fell heavily, the central bank announced urgent action to tighten monetary policy, curb credit and use foreign reserves to buy the lira on the foreign exchange market, which it did in substantial amounts.
The central bank also announced in July that its one-week facility would not be available on the days when it intervenes in the currency market.
Analysts say Basci’s announcement suggests that the lower one-week lending rate would not be available indefinitely, pushing banks to use the higher 7.75 percent rate until the additional tightening policy achieves the central bank’s goal.
“We think this decision is positive to support TRY (lira) as it makes the O/N (overnight) lending rate a credible threat against short TRY positions,” said Deniz Cicek, economist at Finansbank.
The higher overnight rate raises the cost and risk for market operators who borrow lira to take positions which will yield a profit if the lira falls further.
AFP
