Turkish lira briefly drops 10 percent in Asia flash crash

The Turkish lira dived almost 10 percent against the dollar on Monday as a flash crash in the lira-yen rate also sent it tumbling against the dollar and euro.  

The lira fell to as low as 6.38 per dollar in early Asia trading, the lowest level since a currency crisis last summer, before recovering to trade down 0.7 percent at 5.799 as of 10:58 a.m. in Istanbul. It slumped as much as 12 percent against the Japanese yen earlier in the day.

The Turkish lira began trading weaker last week, leading a sell-off in emerging markets spurred by a trade war between the United States and China. Investors are concerned about financial stability in Turkey after the central bank slashed interest rates and then took unconventional measures this month to encourage banks to lend more to businesses and consumers.

The slump in the lira’s value on Monday was the second such flash crash this year after a similar rout in January saw it drop almost 10 percent against the yen. Many small investors in Japan borrow money to buy lira to take advantage of higher yields from Turkish assets.

The flash crash “comes amid a new-found weakening trend, driven by fallout from Argentina, concerns about global volatility and nervousness over Turkish monetary policy mix,” Tim Ash, senior emerging markets strategist at London-based hedge fund BlueBay Asset Management, said in comments on Twitter.

The lira had also fallen victim to similar sell-offs last year after the central bank failed to raise interest rates to support the currency, which slumped to a record low of 7.22 per dollar in July. Now, some investors fear that the central bank, whose political independence has eroded, will cut interest rates too far in order to back the government’s pro-growth economic policies, sparking fresh currency weakness.

President Recep Tayyip Erdoğan controversially replaced the governor of the central bank in July, replacing him with a figure more amenable to his low rates policy. The bank’s policymakers cut the benchmark interest rate by 425 basis points to 19.75 percent later in the month. Turkey’s president has called for further reductions. Inflation in Turkey stands at 16.7 percent.

Monday’s slump in the lira was exacerbated by intensifying trade tensions between Washington and Beijing, which resulted in tit-for-tat tariffs on Friday and a rush to safe haven assets.

Japanese investors traded more lira than any other emerging market currency in July, with volume totaling around $13 billion, according to data from the Financial Futures Association of Japan.