Turkish Lira Sinks After Trump Doubles Tariffs on Turkey

The Turkish lira sank further against the U.S. dollar, standing 6.43 after U.S. President Donald J. Trump doubled tariffs on aluminum and steel from Turkey. As the lira crashes, President Recep Tayyip Erdogan said that Turkey is under an economic war.

In the face of sinking, President Erdogan dismissed fears: “If they have their dollar, we have our people, our right and our God.”

The Turkish Lira tumbles as much as 18 percent on Friday, the biggest fall since the 2001 financial crash in Turkey.

It continued its freefall after talks between Turkish and the U.S. officials failed to resolve the standoff over Pastor Andrew Brunson‘s case.

A group of Turkish diplomats led by Senior Foreign Minister Sedat Onal met with American officials in Washington on Wednesday. But there was no progress or an agreement.

The U.S. previously imposed sanctions on Turkey’s justice and interior ministers, and raised the prospect of further sanctions if Brunson is not released. The evangelical pastor from North Carolina was released from jail last month after 21 months of imprisonment over charges of espionage and terrorism.

He then has been placed under house arrest.

On Friday, things, however, got worse. Trump tweeted that he placed new tariffs against Turkey. The tariffs on aluminum will be 20% while steel will be 50%.

I have just authorized 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! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!

— Donald J. Trump (@realDonaldTrump) August 10, 2018

In the face of rout, President Erdogan appeared defiant. At a speech in Black Sea province of Rize, his hometown, Erdogan portrayed the lira’s fall as a plot to undermine Turkey’s rise.

“There are various campaigns against Turkey. Don’t heed them. Don’t forget, if they have their dollars, we have our people, our right and our God,” the president said, dismissing fears over Turkey’s inability to stem the rout.

“We are working hard. Look at what we were 16 years ago and look at us now,” he added, pointing to Turkey’s decade-long economic growth.

He urged people to sell their gold and dollar to shore up the weakening lira.

Lira’s Freefall

Turkey’s embattled lira on Friday hit new record lows against the U.S. dollar and euro, losing over six percent in value as strains with the United States showed no sign of abating and fears grew over the exposure of European banks.

The lira has now lost over a third of its value against both the dollar and the euro this year, with the currency battered by both concerns over domestic economic policy and the political situation.

Versus the euro on Friday the lira lost 7.0 percent to trade at 6.8.

Turkey remains at loggerheads with the United States in one of the worst spats between the two NATO allies in years over the detention for the last two years of American Pastor Brunson and a host of other issues.

Talks this week in Washington failed to resolve the impasse which has led both sides to slap sanctions on senior officials amid fears of graver measures to come.

Doubts over Central Bank

Meanwhile, markets are deeply concerned over the direction of economic policy under President Erdogan with inflation nearly 16 percent but the central bank reluctant to raise rates in response.

UBS chief economist for EMEA emerging markets Gyorgy Kovacs said a giant rate hike of 350-400 basis points would be “consistent with real rate levels that in the past helped to stabilize the currency.”

He warned a “rate hike alone might not stem the worries about the US and Turkey tensions and a potential further escalation.”

And it remains unclear if the bank would be willing to sharply lift rates with analysts saying the nominally independent institution is under the influence of Erdogan, who wants low rates to keep growth humming.

Erdogan after winning June 24 elections with revamped powers tightened his control over the central bank and appointed his son-in-law Berat Albayrak to head a newly-empowered finance ministry.

“President Erdogan’s strengthened powers under the new presidential system have made it increasingly uncertain whether policymakers will be able to act to stabilize the economy,” said William Jackson, chief emerging markets economist at Capital Economics in London.

He said the lira’s fall was being exacerbated by fears the central bank “isn’t being permitted to raise interest rates”.

‘Accelerating speed’

Concerns were intensified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank (ECB) had over the last weeks began to look more closely at eurozone lenders’ exposure to Turkey.

The report said that the situation is not yet seen as “critical” but Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas are regarded as particularly exposed.

“Investors have been looking at the unfolding currency crisis in Turkey as a local difficulty, however, the accelerating speed of the declines appears to be raising concerns about European banks exposure to the Turkish banking system,” said Michael Hewson, the chief market analyst at CMC Markets UK.

Albayrak, who formerly served as energy minister, is on Friday expected to announce what he has described as a “new economic model” for Turkey but markets remain skeptical.

The president did nothing to reassure markets with comments overnight that the pressure on the lira was due to what he described as a “variety of campaigns” and appearing to play down the magnitude of the crisis.

The plunge in the lira has featured remarkably little on Turkish television channels and newspapers — most of which after recent ownership changes are loyal to the government — with most media focusing instead on recent flooding by the Black Sea.

Turkey, US Fail to Reach Accord Over Detained Pastor Brunson