Market Overview

Turkish Lira Falls to Record Low in Wake of Corruption Scandal, Tax Hikes

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Turkish Lira Falls to Record Low in Wake of Corruption Scandal, Tax Hikes
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The Turkish lira deepened its slide on Thursday, falling to a new low against the U.S. dollar, pressured by news of a government corruption probe involving bribery and money laundering.

On December 17, the sons of three cabinet ministers and the chief executive officer of the Turkish state-run bank Halkbank were arrested. The investigation has also resulted in the dismissal of numerous cabinet officials.

Consumption tax increases announced on Wednesday reduced the likelihood of an interest-rate hike, weighing further on the Turkish currency. The increase in consumption taxes could substantially add to inflation this year, potentially making the currency less desirable to hold. Turkey's large current-account deficit is another factor contributing to the vulnerability of the currency.

The benchmark BIST 100 stock index is also trading sharply lower amid the political crisis.

Related: Gold Sells Off Sharply After Fed Taper Decision

Babacan Comments

Speaking at a business conference in Ankara on Thursday, Deputy Prime Minister Ali Babacan addressed the issue of instability, saying, "It is a temporary situation. It is to do with the political perception."

Turkey is due to hold local elections in March, with presidential elections scheduled for later this year.

Dollar Reserves

Earlier in the week, the lira saw a brief respite after the Turkish central bank sold off some of its dollar reserves in order to bolster the currency. The central bank sold a total of $1.2 billion on Monday and Tuesday.

U.S. Monetary Policy

The recent reduction of stimulus from the Federal Reserve has played a part in the weakening lira. Last month, Federal Reserve policy makers agreed on the first reduction of their $85 billion monthly bond-buying program, contributing to a movement away from emerging markets currencies in favor of the U.S. dollar. The South African Rand, another emerging market currency impacted by tighter U.S. monetary policy, fell to its lowest levels since March of 2009 on Thursday.

USD/TRY Daily Chart

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