Turkey’s lira briefly fell to a record low against the United States dollar on Thursday as investors fretted about depleted currency reserves and the need for foreign financing as the coronavirus pandemic drains the economy.
Thursday’s fall to nearly 7.27 liras to the dollar pushed the lira beyond the record low hit during a 2018 currency crisis and extended five sessions of declines as the country sought to mitigate the economic impact of the outbreak, which has killed 3,584 people in Turkey.
It later recovered ground after the banking watchdog announced a ban on lira transactions by BNP Paribas, Citibank and UBS, saying the banks were unable to fulfil Turkish lira liabilities in due time.
The state-owned Anadolu news agency had earlier reported that the watchdog was launching legal action against London-based institutions it said had mounted a “manipulative attack” on the Turkish lira.
The lira stood at 7.1500 at 12:44 GMT, firming 0.7 percent, having weakened as much as 1 percent to 7.2690. It has lost some 18 percent this year under pressure from the COVID-19 pandemic, with more than 130,000 confirmed cases in Turkey.
Market concerns had been stoked by comments from a US Federal Reserve policymaker, which traders interpreted as ruling out a Fed swap line to cushion Ankara’s depleted foreign exchange reserves.
Swap lines – in which the Fed accepts other currencies in exchange for dollars – are meant to support big foreign dollar markets and not serve as a credit facility. The Fed did not include Turkey when it expanded them to some emerging markets in March.
Turkey’s Finance Minister Berat Albayrak voiced optimism in a conference call with investors on Wednesday about sealing a swap line deal for exchange funding, but he gave few details, several participants in the call told Reuters.
Heading for its second recession in less than two years, Turkey has asked the US Federal Reserve and other central banks for access to funds as its own net foreign currency reserves have fallen to around $28bn from $40bn so far this year, reaching as low as $25bn two weeks ago.
Data on Thursday showed the gross foreign exchange reserves of the Central Bank of the Republic of Turkey (CBRT) stood at $51.46bn as of May 1, down from $52.66bn a week earlier.
A Fed policymaker – asked on Wednesday about extending swap facilities to Turkey and others in need – said the Fed already has lines with countries that have a relationship of “mutual trust” with the US and the highest credit standards.
A Turkish foreign exchange trader said those comments helped weaken the Turkish currency. “We think pressure on the lira will continue in the short term,” the trader said.
In the call with investors, Albayrak defended Ankara’s policies in the face of the currency selloff, saying Turkish reserves were more than adequate, according to participants on the call.
But despite his optimism, investors fear Turkey could struggle to address the cash crunch.
“We already have one foot in the hole of a currency crisis,” said Cristian Maggio, head of emerging market strategy at TD Securities. Turkey’s central bank was burning through foreign exchange reserves at a faster pace than any other emerging-market central bank.
Analysts say the drop in the central bank’s reserves is largely the result of its funding of state bank interventions to try to stabilise the lira. Compounding worries, Turkey faces a relatively high $170bn in external debt costs this year.
As the lira weakened, Turkey published regulations on Thursday that would punish institutions spreading “false or misleading information” in financial markets.
“It smacks of the Turkish authorities trying to boss and bully the market and analysts, rather than get on the front foot in terms of the policy response,” Timothy Ash of BlueBay Asset Management said.
He said markets do not trust monetary policy in Turkey, given comments from Turkish officials including President Recep Tayyip Erdogan, showing an aversion to interest rates.
“When the economy needs rate hikes to defend the lira, as of now, we kind of know the CBRT will not be able to hike – or will be too slow to hike to make a difference for the lira,” he said.