Turkish investors buy up dollars during record lira rally

Many Turkish companies and individuals bought foreign currency last week even as the lira registered its biggest weekly gain in almost two decades, Bloomberg reported, citing currency traders it did not identify.

Demand for dollars barely grew as the lira surged by more than 10 percent against the dollar, demonstrating that the increase did little to restore faith in the currency among many Turks, Bloomberg said.

“Local retail investors were unwilling to sell their hard-currency deposits,” said Onur Ilgen, head of treasury at MUFG Bank in Turkey. “On the contrary, they were gradually buying the U.S. dollar after the pair broke through the 8 handle.”

The rally in the lira paused on Monday as it fell by 0.5 percent to 7.6976 per dollar. The discrepancy between foreign investor demand for the lira and that of Turks comes ahead of a central bank meeting this week, at which many economists expect the bank to hike interest rates substantially. That would increase returns for investors who hold the currency.

The amount of foreign currency held in local deposit accounts rose by just over $1.5 billion, or less than 1 percent, in the first three days of last week. Deposits had increased to an all-time high of $224.2 billion in the week ending Nov. 6, when the lira slumped to a record low of 8.58 per dollar, according to figures published by the central bank.

Turkish President Recep Tayyip Erdoğan sacked and replaced the governor of the central bank on Nov. 7. The president’s decision has raised expectation among economists and foreign investors that monetary policymakers will hike the benchmark interest rate of 10.25 percent at the meeting on Thursday.

The central bank, under new governor Naci Ağbal, a former finance minister, is expected to increase the benchmark by 4.75 percentage points to 15 percent, according to the median estimate of economists surveyed in polls by Reuters and Bloomberg last week.

Such a substantial hike in interest rates would help stabilise the lira but could also plunge the country into an economic recession. Erdoğan is a vocal supporter of lower interest rates, which his government has used to encourage a borrowing boom this year.

The lira continued its decline on Tuesday, dropping by 0.5 percent to 7.7344 per dollar.