The Turkish lira tumbled to the lowest level against the dollar since May in the second day of frenetic trading, even as authorities spent about $2bn in an attempt to fend off the heavy selling.
The currency dropped as much as 1.6 per cent on Tuesday to 6.97 against the dollar as Turkey’s defence of the currency crumbled. The sharp decline represented a renewed pick-up in volatility after an abrupt drop late on Monday. Authorities had previously succeeded in holding the lira steady at around TL6.85 since mid-June.
The tumult has defied vigorous resistance from Turkey’s state banks. One London based-analyst said the lenders had sold about $1.2bn alone on Monday as they sought to defend the currency. By 8.30am London time on Tuesday, they had sold a further $600m. An international fund manager, who also asked not to be named, estimated that the banks had sold about $1bn on each day.
The central bank did not immediately respond to a request for comment regarding the intervention this week. It has previously denied that it is targeting a specific level for the currency, saying it has only acted to smooth volatility.
Many economists and investors say authorities are seeking to effectively peg the lira at a specific level against the dollar. The intervention has come at a major cost for Turkey, eroding the country’s foreign currency reserves. Turkey has spent about $60bn this year on currency interventions, according to an estimate by the investment bank Goldman Sachs.
Piotr Matys, an emerging market currency strategist at Rabobank, said that it was striking that Turkey was having to battle to defend the lira against the dollar at a time when the greenback was weakening. “The dollar is soft and yet the lira is not benefiting at all,” he said.
The support for the lira has taken a heavy toll on the country’s already low foreign currency stockpiles. Gross reserves have fallen $17bn this year to $89.5bn, including gold.
To fund the intervention, the central bank has relied on borrowing foreign currency savings held by Turkish depositors at domestic banks.
New figures released on Tuesday showed that such short-term borrowing reached a record high of $31.3bn in June. The central bank’s total outstanding borrowing through swap agreements also reached a new peak, rising last month to $54.4bn.
As a result, the central bank’s net reserves, which show how much money it holds in its foreign currency war chest once borrowed money and other liabilities are deducted, have taken an even heavier hit than the gross figures. Net foreign assets — a yardstick for net reserves — were roughly negative $32bn at the end of June, according to Financial Times calculations.
Mr Matys said that the state of Turkey’s reserves was “truly worrisome”, and that the country was “walking on thin ice”. He added: “They’re intervening quite heavily. And the question is how long they can do that.”
*This story has been amended to report the Turkish currency on Tuesday hit the lowest level since May.