The Value of the Turkish Lira Plummets... Will It Spur Dollar Strength?

Hana Financial Investment Report
Turkish Lira Hits Record Low Value
"High Likelihood of Linking to Euro Adjustment and Dollar Rebound Factors"

[Asia Economy Reporter Minji Lee] As the value of the Turkish Lira has fallen to an all-time low, opinions have emerged that the dollar's weak trend may weaken. This is because uncertainty about the Turkish economy could lead to euro adjustments and dollar rebounds.

According to the financial investment industry on the 16th, the value of the Turkish Lira is hitting record lows. The current exchange rate against the dollar has risen to 7.34 Lira. At the end of May, it was around 6 Lira per dollar, but it surpassed 7 Lira in just three months. Seungjin Park, a researcher at Hana Financial Investment, said, "Factors such as extreme monetary stabilization policies, uncertainty stemming from Turkey's economic structure, and deteriorating policy trust have had a combined impact."

[Image source=Yonhap News]

In June last year, the Central Bank of Turkey raised the policy interest rate to an extreme 24% after economic sanctions triggered by diplomatic conflicts with the United States led to currency depreciation and soaring inflation. Since then, the 24% policy rate has dropped to 8.25% within a year due to rate cuts aimed at stimulating and defending the economy, further weakening the Lira.

The ongoing current account deficit is also having an impact. Turkey serves as a production base for Europe based on labor competitiveness, with an economic structure that imports parts and raw materials, processes them into products, and then exports them again. With manufacturing exports declining due to economic slowdown and the currency value plummeting sharply, cost burdens are damaging profitability. The tourism sector, which had been offsetting the goods trade deficit, was hit hard by COVID-19, causing a sharp decline in surplus. Although foreign exchange reserves were used to defend the exchange rate in the first half of the year, low policy trust resulted in only depletion of reserves.

The Lira's weakness has also increased the burden of external debt repayment. Since 2010, when Erdogan embarked on infrastructure investment through attracting external funds, the scale of external debt, especially in the corporate sector, has significantly increased. The Lira's depreciation raises the repayment burden of these debts, with the country's external debt ratio standing at 56.9% of GDP.

As a result, the sharp decline in Turkey's currency value could act as a short-term factor for euro weakness and dollar rebound. According to statistics from the Bank for International Settlements (BIS), banks in mainly Southern European countries are exposed to uncertainty. Currently, banks in Spain, France, and Italy have loan exposures to Turkish banks and companies amounting to $61.3 billion, $24.9 billion, and $21.3 billion respectively. German banks have a relatively smaller exposure of $7.8 billion.

Researcher Seungjin Park said, "It is fortunate that many banks have reduced their exposure since experiencing Turkey's crisis in 2018, but there is sufficient likelihood that the euro, which had shown a strong trend over the past three months, will undergo adjustment," adding, "The recovery of real indicators and changes in central bank policy direction will determine future trends."

He continued, "However, the relatively rapid stabilization of European economies is positive, and the euro's medium- to long-term strong trend, led by fiscal integration, remains valid."

This content was produced with the assistance of AI translation services.