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World markets fear Turkey contagion

Aug 10 2018 14:43

Turkey's lira plunged to record lows against major currencies Friday as it was buffeted by a diplomatic row with Washington, while European markets were also feeling the strain from fears the crisis could spill over into the region's banking sector.

The lira collapsed 12% against the dollar at one point on concerns about tensions with the United States linked to Ankara's detention of an American pastor as well as economic uncertainty.

The lira tempered those gains in late morning European deals to stand about 7.5% lower.

The troubled Turkish unit stood at 5.96 lira per dollar, having earlier hit a record 6.30.

"There's been a rapid plunge seen in the Turkish lira ... as the beleaguered currency has crashed to new all-time lows," said XTB analyst David Cheetham.

"The lira has been under heavy pressure this year and was already lower by more than 40%, but today's move is the most dramatic seen thus far."

 Diplomatic tensions

Cheetham added: "Where we go from here remains highly uncertain, with recent diplomatic tensions with the US the catalyst for this latest drop."

The losses on Friday extended the previous day's sell-off as high-level talks seeking to slacken tensions with the US produced no apparent breakthrough.

The European single currency meanwhile tumbled to $1.1432 - the lowest level since July 2017 - on concerns about eurozone exposure to the crisis in Turkey.

Separately, the British pound plummeted to $1.2736, extending this week's dive on dollar strength and worries that Britain is heading for a chaotic no-deal Brexit next year.

The Turkish stand-off has led both Ankara and Washington to slap sanctions on senior officials with concerns of graver measures to come.

At the same time, the Turkish economy under President Recep Tayyip Erdogan is showing signs of overheating, with the country running a large current account deficit that makes it heavily dependent on foreign capital inflows.

"The backdrop to endemic lira weakness is of course the familiar one of an economy suffering rising inflation and a burgeoning balance of payments crisis alongside a central bank that has in effect been stripped of much of its independence since Erdogan was re-elected... in June," Ray Attrill, head of forex strategy at National Australia Bank, said in a note.

Concerns were amplified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank (ECB) had over the last week begun to look more closely at eurozone lenders' exposure to Turkey.

The report said the situation is not yet seen as "critical" but Spain's BBVA, Italy's UniCredit and France's BNP Paribas are regarded as particularly exposed.

In midday London deals, the benchmark FTSE 100 was down 0.4%.

Paris shed 1.0% and Frankfurt was down 1.4% in late morning trade.

"For some time now investors have been looking at the unfolding currency crisis in Turkey as a local difficulty," noted CMC Markets UK analyst Michael Hewson.

"However, the accelerating speed of the declines appears to be raising concerns about European banks' exposure to the Turkish banking system."

The Russian ruble dived again on Friday and is now down five percent since the US on Wednesday hit Russia with new sanctions over its alleged involvement in a nerve agent attack in Britain.

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equities  |  markets  |  global markets
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