The Turkish lira fell to its weakest level against the dollar since a record low in November.
Analysts said further losses may be in store, pointing to a deterioration in investor sentiment and renewed dollar strength.
The lira declined by 0.9 percent to 8.498 per dollar on Thursday, as a holiday started to mark the end of the Muslim holy month of Ramadan. That took losses for the week to 3 percent. The currency hit an all-time low of 8.58 per dollar in early November.
Turkey’s lira is losing value after President Recep Tayyip Erdoğan sacked the chief of the central bank in mid-March, bringing in a dovish replacement who has sympathised with his unconventional theory that high interest rates stoke inflation.
The bank has since kept interest rates on hold at 19 percent, even after annual inflation accelerated to 17.1 percent from 15.6 percent in February, and spent billions of dollars of its depleted foreign currency reserves defending the lira. The reserves stand in negative territory when subtracting liabilities.
“Consensus is turning more bearish on the Turkish lira, with some in markets calling this the calm before the storm,” Robin Brooks, chief economist at the Institute of International Finance (IIF), said on Wednesday.
The lira is expected to trade at 8.71 per dollar by the end of the year, according to the average estimate in a monthly central bank survey of finance industry professionals for May. The prediction stood at 7.78 per dollar in February.
The IIF revised its so-called ‘fair value’ for the lira to 9.5 per dollar on May 2 from 7.5 per dollar, citing a sharp deterioration in investor sentiment towards the currency.
The lira may be declining in a repeat of a sell-off seen in June and July last year, when it fell towards the IIF’s previous fair value of 7.5 per dollar from 6.9 per dollar, Brooks said.
The Turkish currency also faces selling pressure due to the improved outlook for the dollar. A surge in U.S. inflation this week, and concern this will force the Federal Reserve to move away from easy monetary policies, has led to gains for the dollar against major currencies.
Risk-taking emerging markets “need to buckle up”, build their foreign exchange reserves, ensure their currencies are free-floating, use orthodox monetary policy and/or obtain dollars from the IMF or friendly states, Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said on Thursday.
“I’m afraid Turkey only ticks the floating FX box there and recent aggressive FX intervention makes that questionable,” Ash said.
Turkey’s foreign currency reserves shrunk by $6.17 billion in March, current account data published on Tuesday showed. Monthly portfolio outflows from the country reached a net $5.7 billion, the most on record, as foreigners sold stocks and bonds.
(This story was updated with strategist’s comments in the 11th and 12th paragraphs.)