Turkish lira climbs on bets Erdoğan can bridge differences with Biden

Turkey’s lira gained against the dollar ahead of a meeting between President Joe Biden and Turkish President Recep Tayyip Erdoğan, which investors hope will produce a breakthrough in mending fractured bilateral ties.

The lira was trading up 0.4 percent at 8.34 per dollar in the early afternoon local time. Biden and Erdoğan are due to meet at a NATO summit in Brussels at 5 p.m. CET.

Erdoğan is calling on Biden to show flexibility about Turkey’s acquisition of S-400 air defence missiles from Russia in 2019, a move that has worsened fraught relations between the two NATO members. The United States sanctioned Turkey’s defence industry in January, just prior to Biden’s inauguration, and had previously excluded the country from a programme to purchase F-35 stealth fighter jets.

The lira rallied to a one-month high over the past week on speculation that Turkey may offer to store the Russian weapons under U.S. supervision. A team of Russian technicians who were training Turkish military personnel on their use were due to depart the country, increasing optimism for a solution to the impasse.

Erdoğan is hoping that a positive meeting with Biden will help strengthen the lira and steady Turkey’s fragile economy, rocked by the deterioration in U.S. ties and his government’s unorthodox economic policies, which have included keeping interest rates at below inflation for much of last year to railroad economic growth.

The lira hit an all-time low of 8.88 per dollar at the start of the month. The lira’s losses have reduced Turks’ spending power and contributed to a decline in public support for Erdoğan and his governing Justice and Development Party (AKP).

Biden’s criticism of Turkey’s human rights record under Erdoğan and a Turkish military campaign against Kurdish fighters allied with the United States against Islamic State (ISIS) in Syria have caused further political tensions.

In an assessment of Turkey’s economy on Friday, the International Monetary Fund said downside risks have increased.

“The economy remains vulnerable to shocks and to changes in sentiment at home and abroad,” the Washington-based fund said. “Domestic risks include a premature relaxation of monetary and credit policies or other policy missteps that further erode credibility and buffers.”

Erdoğan, who says that higher interest rates are inflationary, has sacked three central bank governors in less than three years. Governor Şahap Kavcıoğlu, appointed in March, must cut rates in July or August to help businesses lower costs, Erdogan said on June 1. The central bank’s benchmark interest rate stands at 19 percent versus annual inflation of 16.6 percent.

The lira also gained on Monday after Erdoğan said at the weekend that the central bank had agreed with China to increase a currency swap facility to $6 billion from $2.4 billion. The bank’s reserves, net of liabilities such as currency swaps, stand at a negative of more than $50 billion.