Currencies: Dollar reverses as Turkey currency carnage continues

Currencies: Dollar reverses as Turkey currency carnage continues

The Turkish lira remained under heavy pressure as the country’s currency crisis continued, providing a lift to the dollar and currencies viewed as havens.

The lira USDTRY, +7.0992%  plunged to another all-time low against the U.S. dollar on Monday, with one dollar buying 6.8716, up from 6.4275 lira late Friday in New York. The lira’s drop was the focus on Friday, when the currency dropped 16%, according to Dow Jones Data Group, as Turkey’s problems culminated in a currency crisis.

Don’t miss: 3 reasons the selloff in Turkey’s lira matters for markets all over the world

While the Turkish currency had been hovering around historic lows all summer, it fell of a figurative cliff on Friday after a news report said the European Central Bank was concerned about contagion from Turkey, and President Donald Trump tweeted about further tariffs on Turkish imports on the back of the lira’s devaluation. Turkish-U.S. relations have also been strained by a diplomatic spat over Turkey’s detention of a U.S. pastor.

Weaker currencies make a country’s products more attractive on the global market, but a currency rout can create big problems. Like many emerging economies, Turkey relies on foreign funding, so a plunge in the lira makes it more expensive to repay loans in other currencies. On top of that, Ankara is struggling with double-digit inflation, as well as a government that has spoken out against higher interest rates. Many strategists believe that consistent rate increases are one of the few things that can stave off further weakness in the currency.

On Monday, the Central Bank of the Republic of Turkey pledged it would provide “all the liquidity the banks need.”

The impact of the lira selloff could be felt across global stock markets, as investors assess banks’ exposure to Turkish assets.

Perceived haven currencies, like Swiss franc USDCHF, -0.1407%  and Japanese USDJPY, -0.12%  strengthened some on Monday. The U.S. dollar, which first hit a 14-month high on Friday, earlier climbed to a fresh high on Monday before reversing direction.

The ICE U.S. Dollar Index DXY, +1.12%  was last down 0.1% at 96.217, after gaining 1.3% last week, but notably remained above the key level of 96.

Market participants attributed the move to some profit-taking and turned their attention to the EURUSD, +0.0175% which last bought $1.1425 compared with $1.1412 late Friday.

“The euro has broken through $1.15, which was a key level,” said Brad Bechtel, managing director in FX at Jefferies, adding that $1.1370 was the next technical level to watch for the eurozone currency. If it fell below, the bottom would be wide open.

“In this market you really want to own the dollar, yen and Swiss,” he added. “If the safe haven bid continues, the euro will remain under pressure.”

Across emerging markets, the South African rand USDZAR, +1.6560% and Mexican peso USDMXN, +1.3199% —both of which are popular EM investment destinations—but also the Argentine peso USDARS, +2.4005%  and Indian rupee USDINR, +1.2910%  were under the most pressure.

One dollar fetched 14.2352 rand versus 14.0760 late Friday, its lowest since November, and 19.1635 Mexican pesos, up from 18.9109 pesos, it’s lowest in a month. The greenback was up 29.9680 against Argentina’s peso, up 2.5% at a fresh historic high, and up at 69.8839 rupees, up 1.2% versus Friday, marking a fresh historic low for the rupee, according to FactSet data.

Also read: Argentina may be headed for another currency crisis

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