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Friday move for the dollar rate

Turkish Lira Volatility Prompts Central Bank Intervention

Currency Fluctuations Linked to Weekly ‘Carry Trade’ Activity

Recent instability in the Turkish Lira’s value is driving economic authorities to take action, as speculative trading patterns create significant weekly swings. The currency’s performance diverges sharply between weekdays and Fridays, raising concerns about potential market disruption.

Friday’s Dramatic Drops

Analysis by Bloomberg reveals a pattern of relative stability during the week, followed by a substantial devaluation of the Lira each Friday. This phenomenon is attributed to “Carry Trade” strategies, where investors capitalize on interest rate differentials, maximizing profits by converting earnings on Mondays. The Lira has experienced a particularly volatile period recently.

Fluctuations in the dollar-Lira exchange rate.

Approximately 50% policy interest rates make the Turkish Lira attractive to foreign investors, but this also fuels the influx of short-term capital. Over the past two months, around $3.4 billion has entered the Turkish market through Carry Trade operations. This influx, largely consisting of weekly transactions, presents a risk of rapid exchange rate volatility if investors reverse their positions.

The entrances create an unwanted volatility, and that the Central Bank has planned new measures to reduce this risk.

Erkin Işık, Economist

Turkey’s current account deficit reached $36.4 billion in 2024, according to Trading Economics, highlighting the country’s reliance on foreign investment and making the Lira particularly sensitive to shifts in investor sentiment. Trading Economics

Central Bank Response

The Central Bank is preparing to implement measures aimed at curbing these short-term speculative inflows and fostering a more stable market environment. Potential steps include limiting weekly term transactions or introducing regulations specifically targeting Carry Trade activities. These actions are intended to attract long-term investors and reduce the risk of sudden market shocks.

Friday move for the dollar rate
Mehmet Simsek, Turkish Finance Minister.

Despite the volatility, financial institutions remain divided on the Lira’s outlook. While Morgan Stanley, Deutsche Bank, and ING recommend a positive position on the Lira, HSBC suggests focusing on long-term Turkish bonds. This divergence reflects the ongoing uncertainty surrounding the currency’s future.

The Central Bank’s upcoming actions will be crucial in determining whether the Lira can achieve sustained stability and attract the long-term investment needed to support Turkey’s economic growth.

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