Turkish lira, stocks fall as Trump considers economic sanctions

(Updates story with U.S. Treasury Secretary comment in third paragraph, Goldman Sachs in fourth.)

Turkey’s lira and stocks dropped on Monday after U.S. President Donald Trump threatened economic sanctions over Ankara’s military incursion into Syria and Treasury Secretary Steven Mnuchin said they were ready to be implemented.

The lira fell 0.8 percent to 5.93 per dollar at 3:57 p.m. local time in Istanbul, heading for the lowest level since May and extending losses this year to almost 12 percent. The main BIST 100 index of shares declined 4.2 percent to 94,905.06 points.

Mnuchin said on Friday that Trump had authorised "very powerful" sanctions against Turkey. On Sunday, Trump said he was working with Congress on the matter. Mnuchin, speaking to reporters after ahead of a National Security Council meeting on Turkey on Monday, said the measures are ready if and when Trump decides to move. Trump would be briefed after the meeting, he said.

Limited U.S. sanctions against the NATO ally in August last year sent the lira to a record low against the dollar, sparking an economic recession as interest rates and inflation surged. Goldman Sachs warned that the threat of U.S. sanctions was weakening in the lira, which could slide to 6.25 per dollar in three months, Bloomberg reported on Monday.

But President Recep Tayyip Erdoğan may be calling Trump’s bluff after Trump said he would pull U.S. troops away from Syria’s border with Turkey during a phone call with Erdoğan a week ago, leading Erdoğan to start the operation, Axios news website said, citing unidentified officials.

Some analysts doubt that Trump will go through with the threat of sanctions, hence the lira’s relatively limited falls on Monday. They cited a political crisis earlier this year over Turkey’s purchase of S-400 air defence missiles, during which sanctions were threatened, but not delivered.

"After being led up the hill and down on the S-400 issue, markets don't really believe that Trump has the stomach to sanction Turkey in any meaningful way," Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in emailed comments.

“And with Turkish and Assad troops seemingly dividing up northern Syria, fighting might well die down quickly,” he said.

Turkey’s military operation entered its sixth day on Monday, with fighting between the Turkish military and Kurdish militants continuing to rage. The Kurds say they have reached an agreement with Damascus for Syrian troops to arrive to police the border with Turkey.

Erdoğan signalled on Sunday that he thought Trump and congress weren't serious about sanctions.

“Economic sanctions and such things are being mentioned, but to be honest I see that as mere talk during this process,” Erdoğan told Turkish media.