ISTANBUL - Turkey's lira fell as much as 12.7% to an all-time low of 42 to the dollar on Wednesday, with bonds and stocks also tumbling, after authorities detained President Tayyip Erdogan's main political rival.

The move against Istanbul mayor Ekrem Imamoglu was called "a coup attempt" by the opposition and appears to cap a months-long legal crackdown on opposition figures which has been condemned as a politicised attempt to silence dissent.

The lira traded at 37.9105 to the dollar at 1523 GMT, from a close of 36.67 on Tuesday, having recouped some of the losses from the all-time low it hit earlier - but still having had its biggest decline since July 2023. The earlier tumble to 42 marked one of the lira's largest absolute intraday moves on record.

"The market has been increasingly concerned about political probes and arrests in Turkey," said Tatha Ghose, EM & FX Analyst at Commerzbank, adding a lira rate of 40 to the dollar would be too inflationary to stomach for the central bank.

"(Turkey's lira) is the most heavily positioned carry-trade in the emerging markets space at the moment in our view, and a sharp move could potentially lead to further outflows," said Frantisek Taborsky, EMEA FX & fixed income strategist at ING. "On the other hand, we should see local banks providing some FX support."

Turkey's international government bonds also came under pressure with longer-dated maturities suffering the sharpest falls. The 2045 maturity was down 1.4 cents to be bid at 85.286 cents, its lowest level since mid-February.

MONETARY POLICY

Finance Minister Mehmet Simsek said they were doing everything necessary to ensure healthy functioning of the markets, without giving further details.

Bankers calculate that the Turkish central bank sold a minimum of $5 billion in FX after lira's crash, while some say it may have already reached $10 billion for the day.

Analysts and investors were also concerned about the knock on effect for monetary policy, worrying that the sharp decline in the lira could delay or halt the rate-cutting cycle since the central bank has been ensuring real appreciation of the currency for months.

The central bank had in December embarked on an easing cycle for the first time after an 18-month tightening effort that reversed years of unorthodox economic policies and easy money championed by Erdogan, which had seen the economy run red hot and inflation exceeding 70%. Erdogan has supported the steps by the central bank for a more orthodox policy.

"With this FX shock they need to keep rates where they are for now," one banker said.

Stocks also crashed, reflecting investor worries over rule of law. Turkish blue-chip stocks closed down 8.72%.

The banking sub-index closed down 9.88%. Borsa Istanbul said trading had been halted temporarily after the main BIST 100 index fell 6.87% in early trading and the market-wide circuit breaker was triggered.

Borsa Istanbul said trading was halted temporarily again at 1108 GMT and restarted at 1138 GMT. After trading resumed, Turkish blue-chip stocks traded 6.88% down.

"A wave of selling was triggered after Imamoglu...was detained," said Serhat Baskurt, algorithmic operations manager at ALB Yatırım. "Political uncertainty currently prevails and concerns about foreign investors leaving the country have increased."

Baskurt said he expected the decline on the stock exchange to continue over the coming days.

Borsa Istanbul said the uptick rule on short sale transactions for the BIST 50 index would be used on Wednesday. The rule requires short sales to be conducted at a higher price than the previous trade.

(Reporting by Ezgi Erkoyun and Canan Sevgili; additional reporting by Sruthi Shankar and Libby George, writing by Karin Strohecker, graphic by Marc Jones and Sumanta Sen; Editing by Jonathan Spicer, Andrew Heavens, Rachna Uppal and Alison Williams)


Reuters