Turkish lira slides after U.S. Senate passes sanctions bill

Turkey’s lira fell, plumbing its weakest levels in two months, after the U.S. Senate approved economic sanctions against Turkey for its purchase of Russian air defence missiles.

The lira dropped by 0.5 percent to 5.91 per dollar at 10:55 a.m. in Istanbul, taking losses this week to almost 2 percent.

The Senate backed the sanctions, contained within the $738 billion National Defense Authorization Act (NDAA), by 86 votes to 8 in sessions late on Tuesday. The bill, which also includes wider measures on defence, will now pass to President Donald Trump for approval. It also prohibits the sale to Turkey of F-35 fighter jets.

Political tensions between the United States and Turkey over Ankara’s purchase of the S-400 missiles have intensified investor concerns over economic stability in the NATO member. President Recep Tayyip Erdoğan’s government is seeking to return the economy to growth after a currency crisis last year plunged it into recession.

Erdoğan said at the weekend that Turkey may bar U.S. military forces from a key NATO airbase at Incirlik in southern Turkey should the economic sanctions be approved.

Trump, who enjoys warm relations with Erdoğan, must now decide what measures to take, if any, under the Countering America’s Adversaries Through Sanctions Act (CAATSA). Trump has said he would approve the NDAA “immediately” after it passed Congress.

Tuesday’s legislation also foresees lifting an arms embargo against the Greek-Cypriot controlled Republic of Cyprus. The Mediterranean island has been divided since 1974, when Turkey invaded the northern third in response to a Greek Cypriot coup backed by Greece. Turkey keeps more than 30,000 troops there and deployed armed drones to the island this week. 

The lira’s losses over the past week have contrasted with gains for almost every other emerging market currency. The South African rand has strengthened by more than 2 percent and the Brazilian real by about 1.8 percent.

Investors have also been selling lira after the central bank cut interest rates by 2 percentage points to 12 percent last week, reducing profits from lira-denominated bonds. Benchmark 10-year lira debt offers annual returns of about 12.5 percent, little more than November's inflation rate of 10.6 percent. Consumer price inflation is expected to accelerate again in December, further crimping real returns from bond investments.