The lira weakened to a record low of 2.4140 against the dollar on Tuesday after a fall in the value of the ruble in Russia, a fellow emerging market, and concerns about mounting political risk amid a row with the European Union over a government crackdown on the free press.
The lira's tumble comes amid concerns about wider emerging-market weakness when the US Federal Reserve (Fed) begins lifting interest rates, as expected in 2015, as well as worries about political stability following the detention of several opposition journalists over the weekend.
Main index Borsa İstanbul (BIST) was one of the biggest losers among emerging market stock peers on Tuesday. The BIST traded 4.33 percent lower at 79,291 points through the end of Tuesday's session.
President Recep Tayyip Erdoğan on Monday rejected EU criticism over the weekend arrest of journalists who worked for opposition media outlets and signaled more raids could come. The Central Bank of Turkey and the Treasury will meet part of the foreign exchange needs of state energy importers, the central bank said on Tuesday, in a bid to decrease demand for dollars in the market and help stem a lira slide. The move takes effect on Dec. 17.
Turkish Economy Minister Nihat Zeybekçi said on Tuesday he did not believe the lira's exchange rate required measures of "strong intervention" and that it would find its own balance in the market after it hit a record low the day before.
Zeybekçi also said in comments broadcast live on the state-run Turkish Radio and Television Corporation (TRT) that if 2015 crude oil prices average $75 a barrel, the current-account deficit in Turkey, which imports almost all of its oil and gas, would fall by $12 billion and inflation would decline by 1.5 percentage points.
Other emerging market currencies also weakened sharply against the dollar, fueled by massive price falls in commodity and credit markets. Russia's failed defense of the ruble and a plummeting oil price added to a global emerging markets rout on Tuesday that sent bourses lower in Asia, the Middle East and Europe. In Russia, the ruble fell as much as 20 percent after an early rally in response to an aggressive interest rate hike went sharply into reverse.
Emerging markets are already reeling from a strengthening dollar as the US recovers, sucking investment into US assets in pursuit of better returns. This has led to heavy selling of currencies seen as particularly vulnerable, such as Turkey, Thailand and Indonesia, and policymakers have started to consider taking action. While a falling oil price could help countries dependent on foreign funding to plug balance-of-payments gaps, analysts are now warning the rout on energy markets could prompt contagion beyond energy exporters such as Russia.
"The market needs to see oil prices stabilizing. Then we can reassess the situation. It's risk-off for the time being," said Commerzbank analyst Simon Quijano-Evans. Market insiders said expectations are mounting of further action by Russian authorities to head off a full-blown financial crisis.
"We think capital controls as a policy measure cannot be off the table now," said Luis Costa, a senior analyst at Citi.
Benoit Anne, head of emerging markets strategy at Societe Generale in London, said Moscow "still has some hard work to do" and the flight from Russian assets appears to be spreading beyond professional speculators and taking hold among smaller private investors. "The big change is it's probably more of a retail flow story now than a fast money bearish story," he said, though capital controls are only likely as a "last resort."
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