Lira Slumps as Trump Warns Turkey Over Military Operation

(Bloomberg) — The Turkish lira slumped by the most since August after U.S. President Donald Trump warned the nation against acting in excess in a military operation targeting Kurdish forces in Syria.

The lira weakened 2% to a session low of 5.82 against the dollar after Trump warned Ankara in a tweet that he would “totally destroy and obliterate” the nation’s economy if takes unspecified “off limits” actions.

Whether the Turkish lira will “really be impacted” by U.S. threats will depend on a possible response by President Recep Tayyip Erdogan and whether he moves forward with an invasion into Syria, said Brendan McKenna, a currency strategist at Wells Fargo (NYSE:) Securities in New York.

“You would think new military operations in Syria could draw sanctions from the U.S. and the type of sanctions would also have an impact,” he said. If rhetoric escalates, probably see a move through 6.00/USD “pretty quickly.”

The lira may face further downside from the risk of of sanctions tied to Russian military equipment tied to sanctions linked to Syria, McKenna said.

A White House statement late Sunday said the U.S. wouldn’t stand in the way of an attack American-backed Kurdish forces in northern Syria, and had fueled speculation that a face-off between the allies could be averted.

Investors have been bracing for a Turkish occupation of a strip of northern Syria for months, but the risk of another flare-up between the estranged NATO allies risks derailing the recovery in the lira. A diplomatic fallout between Washington and Ankara last year triggered a currency crisis that dragged the nation into its first recession in a decade.

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(Updates with lira move in second paragraph, strategist comments in third-fifth paragraphs)

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