Turkish lira drops 7%, signalling move towards free market

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Turkey's lira plunged 7% to a record low on Wednesday in its biggest daily selloff since a historic 2021 crash, a move traders said is a 'strong signal' that Ankara is moving away from state controls toward a freely traded currency.

Woman holds Turkish Lira banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration

For much of this year, authorities have taken a hands-on role in foreign exchange markets, using up tens of billions of dollars of reserves to hold the lira steady. The bank's net forex reserves touched a record low of negative $4.4 billion last month, after forex demand surged during the election process.

Markets are also waiting for the appointment of a new central bank governor to replace Sahap Kavcioglu, who spearheaded rate cuts under Erdogan's unorthodox policies. Under pressure from Erdogan, a self-described "enemy" of interest rates, the central bank slashed its policy rate to 8.5% from 19% in 2021 to boost growth and investment. But it sparked a historic lira crisis in December of 2021 and sent inflation to a 24-year high above 85% last year.

 

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