The Turkish lira, the official currency of Turkey, has been able to recover some of the recent losses against the dollar that it experienced this week. However, some analysts warned that the currency is still in for a rough ride as the United States threatened to impose some sanctions on Turkey.
On Friday morning, the lira steadied to 5.8 per dollar. This was a significant improvement from its record low of 7.23 per dollar that was aided by a $15 billion (£12 billion) investment by Qatar. However, in afternoon trading, $1 was buying over 6 lira.
Some analysts warned that the sanction threats could imply more volatility ahead for the lira.
Turkey and the United States are locked in a diplomatic dispute because of the detention of Andrew Brunson, the American pastor who is alleged of playing a role in a failed coup in Ankara approximately two years ago.
Last Thursday, Steven Mnuchin, the US Treasury secretary, informed President Trump that the sanctions were ready to be put in place once Brunson was not freed.
Trump later disclosed in a tweet that the United States would “pay nothing for the release of an innocent man.” He added that the nation is “cutting back on Turkey.”
On the tweet that was posted on Friday, Trump stated: “Turkey has taken advantage of the United States for many years. They are now holding our wonderful Christian Pastor, who I must now ask to represent our Country as a great patriot hostage. We will pay nothing for the release of an innocent man, but we are cutting back on Turkey!”
A research analyst at foreign exchange broker FXTM, Lukman Otunuga, cautioned: “While the lira has scope to claw back more losses, gains may be capped by the ongoing uncertainty.”
Meanwhile, the chief emerging markets strategist at SEB, Per Hammarlund, said that the rebound in the lira is assumed to be temporary, since “the basic reasons for… weakness are still in place.”
He stated: “The sell-off will resume in the absence of a major shift in economic policy making in Turkey.”
He added“Turkish finance minister Berat Albayrak continues to reassure investors that Turkey will address its structural problems, but at this stage crisis measures – including sharply higher policy rates, a tightening of fiscal policy and support to troubled sectors such as construction, retail and banking – will be key. In sum, the economy is set to slow down sharply.”
Hammarlund continued: “Unless the government introduces an austerity programme within the [coming] weeks, an event such as sharply higher inflation (likely) or a large fine on Halkbank for violating US sanctions on Iran (possible), could trigger a full-blown balance of payments crisis, followed by a banking crisis.”
He concluded: “So far, the government has shown few signs of being willing to change course, either on economic policy or in its relations with the US. The lira is in for a bumpy ride.”