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What’s going on with Dollar vs. Turkish lira (USD/TRY)?

What’s going on with Dollar vs. Turkish lira (USD/TRY)?
Ana Zirojevic

For the last six months, the Turkish lira (TRY) has been on a downward trend against the United States dollar, particularly intensified in the last month, following a much larger-than-expected interest rate hike by the Turkish central bank backed by President Recep Tayyip Erdoğan.

As a result of this unexpected move, the rate hikes sparked a short-lived rally for the lira, but the Turkish currency has continued to weaken versus the dollar, as the USD/TRY pair rose 3.18% in the last 30 days, on top of the 42.89% gain over the past six months.

USD/TRY 1-month chart. Source: TradingView

At the same time, the current state is at an all-time high (ATH) for the USD/TRY pair, as it rose to 27.49809 – a level never seen before, according to the most recent data retrieved on October 3.

As things stand, if this pair continues to move upwards, it will target the resistance levels between 27.70 and 27.80, while the decline of the USD/TRY pair will target the support levels concentrated between 27.30 and 26.99.

Effects of rate hikes

As it happens, the Türkiye Cumhuriyet Merkez Bankası (TCMB) delivered a massive rate hike of 750 basis points to 25% in late August, in a surprising turn of events following a protracted period of the government’s unorthodox economics, as Reuters reported on August 24.

Specifically, the increase to 25% from 17.5% followed a fairly modest raise of 2.5% the month before, which came as a slight surprise to experts who had previously expected a 20% hike. According to the central bank, the aim of the move was to ease inflation, which had soared to nearly 48% the month before. 

As the central bank officials said at the time:

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.” 

Inflation continues to rise

Meanwhile, the above measures are yet to produce concrete results, as Turkey’s annual inflation has surpassed 60% – at the fastest rate this year –  amid a worsening economic outlook exaggerated by the oil surge.

Turkey’s inflation rate. Source: Bloomberg

Indeed, Turkey is a major importer of energy, and the central bank’s latest estimates for the annual average oil price currently stands at $79.4 – leading to the pace of annual price gains jumping to 61.5% in September, from nearly 59% in August, as Bloomberg reported on October 3.

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