The Turkish lira firmed on Thursday afternoon after US President Donald Trump said the United States is not currently looking at sanctioning Turkey over its purchase of Russian air defence systems. The currency was steady earlier in the day, shrugging off the US decision to remove Ankara from the F-35 fighter jet programme after it began receiving delivery of the Russian S-400 missile defence system last week. The lira briefly firmed to 5.6140 against the dollar following Trump's comments, before weakening to 5.6325 against the dollar at 1716 GMT.
The currency was trading at 5.6860 against the dollar at 0637 GMT, little changed from Wednesday's close of 5.6840. The currency has been hit this year by Washington's threats that it would impose sanctions on its Nato ally should it go through with the purchase of the Russian system. Isik Okte, a strategist at TEB Yatirim/BNP Paribas, said the statement from the Pentagon on Wednesday regarding Ankara's removal from the F-35 programme was more moderate than expected.
"It is seen as certain that the US will impose CAATSA sanctions but a much harder statement could have been made by the Pentagon," he said, referring to a 2017 law known as the Countering America's Adversaries Through Sanctions Act. "However, by using positive language, it is being pointed out that relations will continue and Turkey will not be allowed to grow closer to Russia."
The Pentagon on Wednesday said it was removing Turkey from the F-35 programme, adding that Ankara would lose jobs and future economic opportunities due to the decision. The first parts of the S-400 air defence system were flown to the Murted military air base northwest of Ankara on Friday, sealing Turkey's deal with Russia. Investors in Turkey were now focusing on interest rate cut expectations.
Earlier this month, Erdogan, a self-described "enemy" of high interest rates, sacked former Central Bank Governor Murat Cetinkaya, saying he had failed to follow instructions on interest rates. In his first comments after being appointed, new governor Murat Uysal signalled a rate cut, emphasising that the bank had "room for manoeuvre" in its monetary policy.
The lira's decline has been stemmed by lower domestic demand for dollar, uncertainty over an expected interest rate cut by the central bank on July 25, as well as an increased global risk appetite on expectations that the US Federal Reserve will lower rates, Okte said. "The only thing that would disturb me at this point is if the central bank cuts interest rates by more than 400 basis points," he said.