Turkish lira rebounds for a second session in a row, but dollar index extends its own rally

Turkey’s embattled lira early Wednesday strengthened against major counterparts for another straight session—notably against the U.S. dollar—even as animosities between Ankara and Washington appeared to escalate.

Turkey sharply ramped up its tariffs on some U.S. imports, including on cars, alcohol, rice and cosmetics, according to multiple published reports citing the country’s Official Gazette.

Even so, the Turkish lira USDTRY, -2.9633%  extended its sharp rally against the dollar and the euro EURTRY, -3.0867% One dollar bought 6.1030 lira, down from 6.3544 late Tuesday in New York, dropping more than 4% thus far Wednesday. Meanwhile, a euro bought 6.9255 lira, versus 7.1904 lira in the previous session, a decline of 3.7% for the common currency against the Turkish unit.

Turkey’s currency tumble has been underpinned by worries about the leadership of President Recep Tayyip Erdogan, who has challenged the independence of the country’s central bank after winning a snap election to retain power back in June. The recent duties said to be imposed against the U.S. come after President Donald Trump on Friday said he authorized the doubling of steel and aluminum tariffs on Ankara, helping to exacerbate the Turkish lira’s plunge.

However, some currency analysts have argued that part of the rally, despite few moves to improve Turkey’s economic condition, including lifting interest rates, is partly due to the perception that lira may have been oversold.

The Turkish lira is “now significantly undershooting,” according to a report dated Aug. 13 from the Institute of International Finance’s estimate of fair value. That also suggests that more pain could be ahead for the country as the country may need funding to shore up its currency, the agency said.

The slide in the lira has also prompted some concern about a spillover effect to Europe and other emerging-market currencies.

“The gains in the Lira have come despite Turkey increasing tariffs on imports across a range of different US products. It will be interesting to monitor whether a potential response to this from the Trump administration later down the line rattles the markets,” wrote Jameel Ahmad, global head of currency strategy and market research at FXTM, in a Wednesday research note.

Meanwhile, the dollar has extended its climb to a fresh 14-month peak, as measured by the ICE U.S. Dollar Index DXY, +0.19% which is up 0.1% early Wednesday. The gauge, which measures the buck’s strength against a half-dozen rivals, has climbed about 0.5% thus far this week and has rallied by more than 5.1% in the first eight months of 2018, according to FactSet data. The bulk of those gains have come in August.

A broader-based dollar index, the WSJ Dollar Index BUXX, +0.08% which measures the buck’s strength against 16 rivals, including the lira, gained 0.1% to 90.45.

The dollar index’s rally has come amid a steady deceleration in momentum for euro EURUSD, -0.1410% and British pound GBPUSD, -0.0393% One dollar bought $1.1328 euro compared with $1.1344 late Tuesday in New York, slipping 0.2%, while the British pound changed hands at $1.2713, versus $1.2721 in the prior session, a slide of about 0.1%.

“The rise in the US dollar has exerted further downward pressure on the pound, pushing it to a new one year low, which in turn is likely to exert upward pressure on UK inflation, or at least stop it from coming down as quickly as it should,” wrote Michael Hewson, chief market analyst at CMC Markets.

A reading of U.K. inflation rose to an annualized rate of 2.5% in July, according to the Office for National Statistics, after holding steady at 2.4% in the previous three months, marking the first gain in the Consumer Prices Index, or CPI, since November. The reading matched expectations.

The latest inflation reading in the U.K. comes after the Bank of England raised interest rates 25 basis points to 0.75% on Aug. 2, citing building inflation pressures.

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