ISTANBUL: The Turkish lira on Monday tumbled to new record lows against the dollar and euro as strains caused by a diplomatic spat with the United States compounded concerns over domestic economic policy.
President Recep Tayyip Erdogan on Saturday said Ankara would sanction two American officials in response to a similar move by the United States against Turkish ministers over the detention in Turkey of pastor Andrew Brunson.
Analysts say that while the sanctions themselves are almost meaningless, the tensions risk hurting the already embattled currency and could be a harbinger of tougher measures to come from Washington.
The lira, which last week hit five to the dollar for the first time in history over the sanctions, was trading at 5.35 to the dollar, a loss of 5.5 percent on the day.
Against the euro, the lira was trading at 6.2, a loss of 5.5 percent on the day, the first time it has ever broken through the 6.0 ceiling.
The currency was also pressured by an announcement by the Office of the US Trade Representative that it was reviewing Turkey's eligibility of a scheme which allows the export of certain products to the US duty free.
In an apparent bid to limit the lira's losses, the Turkish central bank said it modified its foreign currency reserves rules for private banks to allow them another 2.2 billion US dollars of liquidity.
But after the briefest of rallies, the move appeared to only hurt the lira more, with markets despairing over the central bank's apparent reluctance to use interest rates as a monetary policy tool.
"It was another step that has proven that for some reason the central bank is reluctant to use the one single 'clean, normal' instrument -- the key interest rate," said Ulrich Leuchtmann, head of forex and emerging market research at Commerzbank.
Lukman Otunuga, research analyst at FXTM added: "The Turkish lira simply can't catch a break, and there is really no clear end in sight to prevent the currency from further dramatic weakness."
- 'Not in position to raise rates' -
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The row with the US had added to concerns about economic and monetary policy in Turkey after the re-election of Erdogan for a new term with strengthened powers on June 24.
One of Erdogan's first moves after his inauguration was to jettison the relatively trusted economic policymaking team and hand a newly expanded finance ministry to his son-in-law Berat Albayrak.
Meanwhile, Turkey's central bank -- which is theoretically independent -- disappointed markets on July 24 by leaving rates unchanged despite inflation that has now reached almost 16 percent.
Erdogan has repeatedly urged the central bank to lower rates to boost growth, baffling markets by expressing the unorthodox view that lower interest rates can help bring down inflation.
"The current level of real policy rate is insufficient to compensate for the heightened geopolitical risk premium after US sanctions, which will keep the lira vulnerable to a further escalation of geopolitical tensions," said Inan Demir, economist at Nomura, in a note to clients.
He added the central bank's latest comments indicate that it is "not in a position to raise rates and the most that can be expected is to keep rates unchanged for an extended period."
"This means the risk-reward profile for the lira is still unattractive," he added.
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