Turkey currency fluctuations

Turkish currency(Lira) has fluctuated greatly in value in the past 3 months. In this article we will try to examine the trends, response of Turkish government, possible reasons and impact of this change on Turkish people and businesses.

Turkish Lira

Trend

The chart below generated from http://www.finance.yahoo.com shows how lira has held its value in the last 3 months as compared to US dollar. We see a sharp decline in the value of lira in Mid Dec 2013 to end of Jan 2014. We also see that lira has appreciated in value since its low point on Jan 27 2014.

Turkish Lira exchange rate to USD for last 3 months

Reason

One of the major reasons cited for the fall of lira is the announcement of tapering by US treasury. This underscores the impact of US treasury on a global level.Fearing a rapid tightening of U.S. monetary policy and a flagging world economic recovery, investors pull back currently from Turkey and other emerging markets. In addition, in Turkey even that became known in December corruption investigations against government employees who bring the acting since the age of eleven Prime Minister Recep Tayyip Erdogan discredit and undermine the confidence of investors. 

Response from Turkish government

Turkey Central bank convened an emergency meeting to hash out a response to the crash of its currency. In  response it raised its interest rate by a steep 500 basis points despite opposition from government. Since the initial rate hike , Turkish central bank has raised rates further in an attempt to calm the currency fluctuations.

Impact

Industry experts believe the steep interest rate hike will lead to tightening of money availability and in turn hit growth and stoke inflation in Turkey.

People  

After the initial crash which caused households to hoard dollars fearing further devaluing of Lira, steps taken by cental government have assuaged fears of further fall. Speculators are on a buying spree expecting a recovery in the value of lira on a short term basis.

Business 

As expected, the fall in the value of currency had significant impact on balance sheets of some of the major Turkish corporations. This also dented profits of foreign firms that have operations in Turkey. Overall, exporters will see a positive impact on a short term basis as their products will be cheaper in the global market. However, importers will be hit as they will have to shell out a higher amount for their imports.