Turkish lira rally winning over sceptics

The Turkish lira’s gains against the dollar this year, the biggest in emerging markets, are winning over some doubters, who are now predicting further strength for the currency, Bloomberg reported on Tuesday.

Analysts at HSBC and French bank Societe Generale expect the lira to climb to 6.5 per dollar by the end of the year. The currency was trading up 0.4 percent at 6.93 per dollar on Tuesday.

Turkey’s foreign exchange reserves are severely depleted after the central bank spent tens of billions of dollars defending the lira last year. That, along with double-digit inflation, means that Turkish President Recep Tayyip Erdoğan may be dissuaded from interfering in monetary policy, analysts say.

“There is much less room for Turkey to manoeuvre than in recent years,” said Phoenix Kalen, director of emerging markets strategy at Societe Generale.  The pace of gains, though, will probably slow, she said.

The lira has strengthened by almost 20 percent against the dollar since hitting a record low of 8.58 per dollar in early November. The losses had prompted Erdoğan to sack the governor of the central bank on Nov. 7 and to replace him with former Finance Minister Naci Ağbal, who has since hiked interest rates to 17 percent from 10.25 percent.

The lira’s value could become stretched if it climbs to 6.85 or 6.9 per dollar, but there is potential for a brief overshoot to 6.3, said Henrik Gullberg, an economist at Coex Partners in London.

“If the broader environment remains supportive of risk sentiment, which I believe it will be, and the central bank is allowed to maintain its more conservative policy approach, then I think the lira will continue to appreciate,” Gullberg said, according to Bloomberg.

Turkey's central bank next meets on interest rates on Thursday. It is expected to keep the benchmark rate at 17 percent, according to 15 of 21 economists surveyed by the state-run Anadolu news agency. The remaining six forecast a hike of between 0.75 percentage points and 1 percentage point. Inflation in Turkey stood at an annual 15 percent in January.