Turkish lira caps historic week with big lift from government

Ankara

TURKEY'S lira closed out its strongest week on record on Friday (Dec 24), spiking more than 50 per cent with the support of billions of dollars of state-backed market interventions and a promise that the government would cover FX losses on certain deposits.

Turks did not sell dollars on Monday and Tuesday, according to official data that suggested they had played little role in the sharpest market gains. The state interventions, meanwhile, cost the central bank more than US$8 billion last week, according to traders' calculations.

The currency gained for five straight days and touched mid-November levels; it stood at 10.7 versus the US dollar at 1919 GMT on Friday.

The lira had plunged on Monday to an all-time low of 18.4 per dollar, after a months-long slide due to unorthodox interest rate cuts and fears of an inflationary spiral.

But late on Monday, President Recep Tayyip Erdogan unveiled a scheme in which the Treasury and central bank would reimburse losses on converted lira deposits against foreign currencies, sparking the currency's biggest intraday rally ever.

In an interview with broadcaster A Haber, Erdogan said Turks showed confidence in the local currency and lira deposits increased by 23.8 billion lira (S$3 billion) after the anti-dollarisation plan announcement.

But data from the BDDK banking watchdog showed that, after heavy accumulation of dollars last week, Turkish individual depositors held US$163.7 billion of hard currencies on Tuesday - virtually unchanged from Monday and Friday, when the total was US$163.8 billion.

Instead, the lira got a big boost from what traders and economists called backdoor dollar sales by state banks, supported by the central bank.

In the first three days of last week alone, the central bank's net foreign reserves dropped by US$8.5 billion, according to the calculations of three bankers who spoke to Reuters. The drop totalled nearly US$18 billion in December, they said.

"We suspect positioning and stealth intervention will continue to dominate the price action," said Win Thin, global head of currency strategy at Brown Brothers Harriman. "Even if the lira stabilises, there are still strong inflationary impulses in the economy that will continue to erode the value of any local currency holdings."

Hakan Kara, former chief economist at Turkey's central bank, said on Twitter that the bank's FX sales amounted to US$17-20 billion this month, including US$3 billion on Wednesday alone, though he said it was unclear specifically how they were used. REUTERS