The Turkish Lira opened the week with a gap of over 15% against major currencies after the removal of the Turkish central bank governor by President Erdogan over the weekend, leading the country to a new monetary crisis.
The currency collapsed in the very early hours of Asian Monday trading, hitting a low of 8.50 against the US dollar and 10 against the Euro before pared back some losses.
The governor hiked the country’s main interest rate by 200 basis points to 19% last week, which was necessary to fight the 15% inflation level, restore some policy credibility, increase the foreign reserves, and bring stability to the lira.
However, President Erdogan shocked the financial markets for a third time since 2019, removing the hawkish governor, and replacing him with an opponent of higher interest rates, and tight monetary policy.
The Istanbul stock exchange lost 10%, while the government’s bonds suffered their biggest daily drop on record as investors expect prolonged market volatility, risk of debt default, and rate cuts.
The surprised removal had a brief ripple effect on the financial markets, with investors rotating away from companies exposed to the Turkish economy, and reduced some positions from the risky emerging markets, and their high-yielding currencies.
The safe-havens US dollar and Japanese Yen led the gains across the board amid a general risk aversion sentiment as investors worry over a possible contagion in the global markets.
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