Negative mood drives lira to six-month low against dollar

ISTANBUL – The Turkish lira weakened against the dollar yesterday to its softest level since November, to stand 4 percent weaker than it ended last week, as negative sentiment gained momentum. The currency eased to 1.3710 against the dollar in morning trade on the interbank market, its weakest in around six months according to Reuters data, and 1.9 percent weaker than Wednesday’s close. Bonds also slipped with the benchmark April 9, 2008 bond yield rising to 14.34 from Wednesday’s 14.32 percent, while Istanbul’s main stock index ended the day up 0.3 percent after a quiet session with low volume. Some currency analysts thought the sell-off was exaggerated and saw an opportunity to get back into the lira, which some investors did and it closed on the interbank market at 1.3555, 0.8 percent weaker than the day before. Investors’ sentiment over Turkey has turned sour, triggered in part by a hefty inflation figure a week ago. That sharpened attention on a gaping current account deficit, concerns the government is losing its verve over European Union-sought reforms and expectations of early elections. «People who didn’t care before about the current account deficit now bring it up, people who didn’t think about politics now bring them up,» said Lehman Brothers emerging markets research director Tolga Ediz, adding that the reaction was overblown. Monthly April inflation of 1.34 percent, almost three times higher than forecast, prompted a sell-off in the bond market, sending yields to 2006 highs, reflecting the view that interest rates will stay higher for longer. That then hit the lira. «I think really it’s the realization that rate cuts aren’t going to be as plentiful (as thought),» said Sonal Desai, economist at Dresder Kleinwort Wasserstein. One currency dealer said the next support level for the lira was 1.3780 to the dollar, last seen in August. He said much of the selling so far had come from hedge funds but long-term large lira holders could start moving out. «The longer term positions may come under pressure,» he said. Adding to the gloom, Credit Suisse said on Thursday it had cut its asset allocation for Turkish bonds, after a similar move from Merrill Lynch this week. Shrinking liquidity Turkey’s current account is one of the biggest among the emerging markets, partly because of Turkey’s large net oil imports amid rocketing international prices. The deficit, along with political concerns, makes it more vulnerable to shrinking global liquidity, and therefore particularly sensitive to risk appetite and rising US rates, which draw cash from emerging markets. The US Federal Reserve said after Turkish markets closed on Wednesday that while it could pause on rate rises, if necessary it would hike again. «The risks are on the rise and… we’re seeing investors reduce exposure to Turkey,» Danske Bank economist Lars Christensen said. «We’re much much more concerned about the political situation than we were.» Adding to political concerns, President Ahmet Necdet Sezer vetoed this week a social security bill demanded by the International Monetary Fund, which is in Turkey this week for a review as part of its $10 billion loan program. The government can force the bill through parliament again, but it could end up being rejected by the constitutional court. «We doubt that this will impact the third review under the IMF stand-by agreement, but it does raise questions over the longer term reform path in Turkey,» Tim Ash, economist at Bear Stearns, said.