Lira Ends Tumultuous Week on a Soft Note as Uncertainty Weighs

Turkey’s lira halted a two-day rally against the dollar as the outlook for central bank policy remains uncertain.

As the week draws to a close, the lira is again on the back-foot, leading emerging-market losses against the greenback. Speculation that the central bank will raise policy rates after President Recep Tayyip Erdogan met with top economic officials helped the lira to rebound from a record low reached Wednesday.

“If steps are not taken soon, market pressure for action will likely re-emerge, given the heightened expectations that have been created by the recent summit,” Morgan Stanley analysts including James Lord wrote in a report to clients.

Morgan Stanley says it now expects a 150-basis-point increase by June, up from 50 basis points penciled in earlier, and says the the central bank would hold an interim meeting if the currency comes under pressure again.

The lira dropped 0.5 percent to 4.2541 per dollar as of 11:15 a.m. in Istanbul, after strengthening 2.4 percent in the previous two days. A rout this week, which saw the pair touch a record 4.3743 Wednesday, was fueled by concerns that a stronger U.S. currency would trigger capital outflows from emerging markets and has been compounded by fears that Erdogan may oppose any rate increase before elections on June 24.

Still, the scope for a rally in the lira is limited, the Morgan Stanley said. The timing of any rate increase remains uncertain, the market will likely have doubts whether this is just a “tactical step to ease market pressure,” while incoming economic data will “likely remain negative,” they said.

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