ISTANBUL: Turkey's lira slid more than 3 percent against the dollar on Thursday, swept up in a global market sell-off and investor worries that lower-than-expected inflation data could prompt the central bank to make a premature rate cut.
In the second day of 2019 trade, the lira was already showing the volatility that characterised last year, when it fell as much as 47 percent against the dollar, raising concerns about a banking crisis and an economic meltdown.
It has since recovered some of the losses, finishing last year down nearly 30 percent against the dollar.
Financial markets around the world were jolted on Thursday by a rare revenue warning from Apple, deepening concerns about slowing global economic growth and prompting investors to seek safety in bonds and less risky assets. Currency markets saw a wild spike in volatility in holiday-thinned trade in Asia, with the Japanese yen moving sharply higher against the US dollar.
The lira was also caught up in the so-called "flash crash", briefly weakening as far as 6.4486 against the dollar in overnight trade. By 1441 GMT it stood 5.5340 to the dollar, trimming some losses although it had weakened more than 3.5 percent during the day.
"Looking at the trend in the first two days of the year, there is a very strong flight from risk," said a forex desk trader at one bank.
EARLY RATE CUT?
Jitters were also increasing about the possibility of an early rate cut. Data on Thursday showed that inflation eased for the second straight month in December, helped by tax cuts and discounted products.
The next meeting of the Turkish central bank's monetary policy committee (MPC) is on Jan. 16.
"The further fall in Turkish inflation in December, combined with the weakness of the latest activity and the recovery in the lira, means that the central bank is likely to press ahead with a rate cut at this month's MPC meeting," Jason Tuvey of Capital Economics said in a note to clients.
"The MPC seemed to pave the way for rate cuts at last month's meeting, and the fall in inflation, coming alongside the further deterioration in the hard activity data and the recovery in the lira, will only reinforce its dovishness."
President Tayyip Erdogan's repeated calls for lower interest rates have solidified investors' perception that the central bank is under political pressure. Erdogan, a self-described "enemy of interest rates", wants to see lower borrowing costs to keep the construction sector, and economy, going.
"High interest rates are a major source of support for the lira and lowering them at the time when market sentiment is fragile would be counterproductive," said Piotr Matys of Rabobank.
"The central bank should be very patient and wait until sentiment towards emerging markets improves considerably before cutting rates gradually."
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