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What U.S. Investors Should Know About Turkey's Lira Crisis

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This year has certainly not been a good year for Turkey’s lira. Over the course of 2018, the lira has lost more than 40 percent against the dollar, mostly due to President Tayyip Erdogan’s negative influence over the economy, including mounting debt issues and lower interest rates.

To make things worse, the lira hit a rock bottom last Friday, when U.S. President Donald Trump approved the doubling of tariffs on Turkish steel and aluminum after Turkey refused to free American pastor Andrew Bunson, who has been held captive for almost two years. 

The currency dropped as much as 20 percent against the dollar. The troubled nation’s stock market has also fallen 17%, while its inflation has hit 15%.

Implication for Turkey

This is certainly not good news for Turkey.  Many Turkish companies have borrowed a lot of money during the construction boom, and now with the lira as weak as ever, those companies will most likely have a hard time repaying loans in dollars and euros.

Experts are worried that such drastic plunge in the currency is leading the country into an economic crisis. With investors’ fear heightened, it is a vicious cycle as people’s expectations partially drive currencies, and with this economic situation at hand, expectations are not improving. 

Turkey’s Reaction

On Monday, the Turkish Central Bank announced that banks would be able to receive all the liquidity they needed to keep money flowing. At the same time, the bank didn’t increase interest rates to protect the economy from inflation. After this announcement, although the lira rose slightly, the currency dove again throughout the day Monday.

Spillover to the Global Markets

The Lira’s crash doesn’t stop at Turkey. The collapse resulted in collateral damage over the global markets.

For instance, the European Central Bank reacted to the dive of the lira on Friday, saying that Euro Zone banks may potentially be exposed to the decline. Meanwhile, South Africa’s rand, Russia’s ruble, and India’s rupee all hit multi-year lows against the U.S. currency.

In Asia, China’s Shanghai Composite and SZSE Component traded between 1.2% and 1.3% lower, with Hong Kong’s Hang Seng Index also trading lower by 1.5%.

It seems as if Turkey’s currency crisis is penetrating through many regions—including those of Euro Zone, Asia, and emerging markets.

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