Customers browse gold jewellery on display at a store as others queue to use a foreign currency exchange bureau in the Grand Bazaar’s gold souk in Istanbul last week. The lira has weakened 22% this year, making it the year’s second-worst emerging-market currency following inconclusive elections and militant violence that reached Istanbul on Wednesday.

Bloomberg/Istanbul

Turkish markets extended declines, sending the currency below 3 per dollar for the first time, as domestic political turmoil and a rout in emerging markets deepened.
The lira has weakened 22% this year, making it the year’s second-worst emerging-market currency following inconclusive elections in June and militant violence that reached Istanbul on Wednesday. Facing an economic slowdown, the central bank left interest rates unchanged this week and President Recep Tayyip Erdogan may call a new vote as soon as October.
“Nobody wants to catch the falling knife,” Akin Tuzun, an analyst at VTB in Moscow, said by e-mail.
Currencies in developing nations have tumbled this month as investors anticipated an interest-rate increase in the US and China devalued the yuan. The tenge plunged to a record after Kazakhstan relinquished control of its exchange rate, becoming the latest country to abandon efforts to prop up its currency before the US Federal Reserve acts. Vietnam devalued its currency on Wednesday for the third time this year and South Africa’s rand reached the lowest since 2001.
“The lira is one of a number of emerging-market currencies which are under strain largely because of domestic vulnerabilities and weaknesses,” Nicholas Spiro, the managing director of London-based Spiro Sovereign Strategy, said by e- mail. “Even if there’s a modest improvement in the external backdrop, the lira is unlikely to benefit. This is a mostly home-grown currency crisis that has yet to run its course.”
The currency depreciated as much as 2.7% to trade at 3.0031 per dollar in Istanbul. It was at 2.9765 as of 2.09pm local time and later gained 0.6% to 2.9088 per dollar by 5.59pm in Istanbul. The Borsa Istanbul 100 Index of stocks dropped 1.7% to the lowest since October 16. Stocks also trimmed losses to 0.8% later. Government bonds, which had stopped trading before the lira’s bounce, slid for the sixth day.
Credit-default swaps insuring Turkish sovereign debt against default for five years rose to 285 points, the highest on a closing basis since June 5, 2012, CMA prices show. The yield on 10-year government notes increased 18 basis points to 10.44%.
While Turkish policy makers kept borrowing costs on hold for a sixth month this week, they’ve pushed the weighted-average cost of central bank funding up more than 100 basis points to 8.67% as of yesterday. The bank decided to implement a tighter liquidity policy “as long as deemed necessary,” it said in a statement accompanying its rates decision.
“It’s hard to find a catalyst that can reverse the lira’s decline,” said Akin Tas, vice president of derivatives trading at Istanbul-based Akbank. “The market fears the central bank will remain behind the curve.”
Turkey is more reliant on capital inflows than many countries because of the size of its current-account deficit, making it among the most vulnerable economies to higher US borrowing costs. Its shortfall is expected to shrink to 4.9% of gross domestic product this year, from 5.8% in 2014, according to the median estimate of 21 economist surveyed by Bloomberg. That compares with an average 1.5% gap in emerging economies.
Fed officials have indicated concern about stubbornly low inflation, even as they signalled that an improving job market is bringing them closer to the first interest-rate increase in almost a decade.
Turkey’s economy will probably grow 3% in 2015, less than the 5.4% average in the past five years, according to data compiled by Bloomberg. While inflation slowed to 6.8% in July, consumer-price increases remain above the central bank’s 5% target.
Societe Generale analysts Phoenix Kalen and Roxana Hulea said the lira may depreciate to as low as 3.2088 per dollar, according to an e-mailed note on Wednesday.
There’s little information on what caused the lira’s slump yesterday morning, according to Emre Tekin, a senior fixed- income trader at Turkiye Garanti Bankasi. “I heard a market player bought not more than $20mn and bid at a higher level and triggered algorithms,” he said.
The lira is now trading well below the median of 39 economist estimates compiled by Bloomberg, which forecast the currency at 2.84 per dollar by the end of September.
A flare up in violence on Wednesday added to pressure on the lira, as assailants tossed a grenade at a guard post at Istanbul’s Dolmabahce Palace and then opened fire, setting off a gun battle in the centre of Turkey’s largest city. No one was killed and two members of a leftist extremist group were detained.
Eight soldiers were killed when the Kurdistan Workers’ Party, or PKK, detonated a land mine under an armoured vehicle on Wednesday in the south-eastern town of Siirt, state-run TRT TV reported.
A government offensive against terrorist groups and the collapse of a three-year truce with Kurdish militants followed parliamentary elections in June that failed to deliver a ruling majority to any one party. Talks to form a coalition government failed and Turkey may be headed for fresh elections within about three months.
Nationalist opposition leader Devlet Bahceli called on Wednesday for the use of martial law in war-torn areas.