Turkish lira hits record low as investors fret over economy, Greece spat

Turkey’s lira briefly hit a record low on Wednesday as concerns among investors over the economy and political and military tensions with neighbouring Greece weighed on sentiment.

The lira weakened to as low as 7.418 per dollar in morning trading in Istanbul. It later rebounded to trade up 0.6 percent at 7.34 per dollar at 2:23 p.m. local time, paring losses this year to 19 percent.

Foreign Minister Mevlüt Çavuşoğlu said on Tuesday that Turkey was ready to “do whatever is necessary, without hesitation” as the Turkish and Greek navies conducted rival exercises in the contested waters of the Mediterranean.

Çavuşoğlu spoke at a news conference with German Foreign Minister Heiko Maas, who was visiting Athens and Ankara to help ease the standoff over territory and hydrocarbon rights, which has persisted for months. Maas warned both sides to step back to avoid any military confrontation.

European Union foreign ministers are due to meet for informal meetings in Berlin this week to discuss possible sanctions against Turkey.

The lira is also coming under pressure as investors fret over Turkey’s economic and monetary policies. The central bank has spent tens of billions of dollars of its foreign currency reserves to prop up the lira this year after slashing its benchmark interest rate to below the rate of inflation to help the government boost economic growth.

A resultant borrowing boom by Turkish consumers and businesses, spurred on by cheap loans from state-run banks, has also widened the country’s current account deficit.

The lira reversed losses in afternoon trading after JPMorgan recommended investors buy the currency for dollars saying selling pressure may be coming to an end, according to local news channel BloombergHT. It placed a so-called "stop-loss" on the trade at 7.65 per dollar and said key technical resistance to an advance lay at 7.189, BloombergHT said, citing a global currency strategy report by the bank.

The Turkish authorities may need to revise their approach to economic policy, credit ratings agency Moody’s said in a report on the global macroeconomic outlook on Tuesday.

“The policy mix that has fed the current economic situation – credit-driven growth, monetary policy accommodation despite high inflation rates, and support to the domestic currency – will likely be difficult to sustain for long if the external demand environment remains challenging,” Moody’s said.

Credit ratings agency Fitch lowered its outlook on Turkish sovereign debt to “negative” from “stable” on Friday citing the central bank’s depleted foreign currency reserves and low interest rates. It rates Turkey's debt at a junk 'BB-'.

The benchmark interest rate in Turkey stands at 8.25 percent compared with annual consumer price inflation of 11.8 percent, meaning real rates are negative. The central bank’s foreign currency reserves, net of liabilities, are also in negative territory.

The central bank has preferred to tighten monetary policy by tweaking other monetary tools such as overnight interest rates and banks’ reserve requirements as the lira came under pressure in recent weeks. Some economists say the steps will not be enough to halt the lira’s slide against major currencies and are calling for hikes to the benchmark interest rate instead.