Turkey's lira approached a record low against the euro on July 27, with the market concerned by state interventions that have tied it to the weakening dollar and concerns that the European Union could hit Ankara with sanctions over Mediterranean drilling plans that have angered Greece and Cyprus.
The Turkish lira (TRY) also, in overseas trade, suddenly slipped to 6.95 against the dollar—the weakest rate seen since mid-May—during July 27 but by the end of the day recovered to a band around 6.85 where it has sat for several weeks.
The TRY has declined by around 7% against the euro in two months, even while it has virtually flat-lined against the US currency despite supposedly being a free-float currency (given central bank interventions, many analysts prefer to talk of a managed float). Turkey's central bank and state banks have sold tens of billions of dollars to stabilise the exchange rate against the dollar, according to data and sources cited by Reuters.
As the euro climbed to its strongest level against the dollar in nearly two years, the lira hit the skids with the greenback. It stood at 8.068 against the euro, compared to its close of 7.973 prior to the weekend, by 01:30 Istanbul time on July 28. At one point during July 27, it fell to 8.146, its lowest rate versus the European single currency since during Turkey's currency crisis in August 2018, when it touched 8.2029.
The longstanding and alarming economic imbalances that Turkey is grappling with are of course another factor in the lack of confidence shown in the lira.
Macron demands action
French President Emmanuel Macron has demanded action against Turkish drilling in the eastern Mediterranean which he describes as "violations". Cyprus says Turkey has infringed its exclusive economic zone, while Athens as warned a Turkish seismic research vessels not to lay cables that come into contact with its continental shelf. Macron has also said the bloc should impose sanctions over Ankara's military involvement in the Libyan civil war.
"Even if sanctions were limited in scope, the threat of more action and the damning signal it would send about Turkey-EU relations would cause capital inflows to dry up and the lira to fall," said Liam Peach, economist at Capital Economics.
July 27 also brought a statement at a press conference from Spain's foreign minister, Arancha Gonzalez Laya, in which she said talks with her Turkish counterpart Mevlut Cavusoglu in Ankara had helped to de-escalate the simmering EU-Turkish tensions. A possible one-month hydrocarbons exploration pause was discussed, she said. Reuters reported her as adding that an “inflexion point” had been reached on the dispute over drilling for oil and gas in the eastern Mediterranean.
Berlin has warned Ankara to cease “provocations”. Turkey has rejected the criticism and said it is abiding by international law.
In his remarks following his meeting with Spain’s top diplomat, Cavusoglu did not mention a pause on drilling.
Ibrahim Kalin, chief adviser to Turkish President Tayyip Erdogan, said last week that threatening sanctions “will never fly here and will have no impact on Turkey’s sovereignty or determination in pursuing the national interest”.