Bloomberg News

Lira Weakens to Record Low on Central Bank Defense Concern

October 04, 2011

Oct. 4 (Bloomberg) -- The lira fell to a record low as the central bank offered fewer dollars than some investors expected in an auction today, fueling concern it isn’t doing enough to defend the currency.

The lira dropped as much as 0.9 percent to 1.9077 per dollar in Istanbul and traded 0.5 percent lower at 1.8995 at 5:45 p.m. Turkey’s currency has lost 19 percent against the dollar this year, the second worst-performer among emerging- market currencies after South Africa’s rand.

The Ankara-based central bank sold $140 million in an auction today, compared with $375 million of bids. Demand has exceeded supply at all auctions since they began Aug. 5, with the largest amount of $350 million sold on Sept. 20, according to data on the central bank’s website.

Today’s foreign-exchange sale was “not enough,” Benoit Anne, Societe Generale SA’s chief emerging-markets strategist, said in e-mailed comments today after the auction announcement. “A strong message would be something like $500 million.” The lira may slide to 1.95 against the dollar in the near term, he said.

Turkey’s currency depreciated 13 percent in the third quarter as the nation’s current-account deficit and the worsening European debt crisis hurt investor confidence in the nation’s financial stability.

“If the central bank doesn’t step up selling and/or global markets do not improve, then we could go towards 2 per dollar this month,” Bartosz Pawlowski, the head of fixed-income and foreign-exchange strategy for central and eastern Europe, the Middle East and Africa at BNP Paribas SA, said in e-mailed comments today. “In the current environment, the central bank would need to be doing at least $250 million to $300 million per day.”

Reserves, Rate Risk

The bank’s foreign-currency reserves, excluding gold, fell by $1.6 billion to $85.6 billion last week, dwarfed by Russia’s $526 billion in currency and gold. Turkey has cut interest rates three times since December to a record low at 5.75 percent to buoy the economy.

“The main risk for the lira assets, as well as for other emerging markets, is a horrible technical picture, given that long-term real money investors have yet to massively cut their risk positions,” Societe Generale’s Anne wrote. “This leaves Turkey at the mercy of significant capital outflows, which would put further downward pressure on the currency.”

Two-year lira-denominated bonds sank, driving yields up 16 basis points, or 0.16 percentage point, to 8.56 percent, the RBS Istanbul Benchmark Bond Index showed.

“The central bank’s interest-rate policy is the main driver behind the lira’s fall,” Bulent Topbas, a fund manager at Strateji Menkul Degerler AS in Istanbul, said in e-mailed comments. The bank may be forced to cut reserve requirements for foreign exchange deposits to back the lira, Topbas said.

--Editors: Stephen Kirkland, Peter Branton

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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