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Turkey’s embattled lira continued to rebound Wednesday for a second straight session, even as the animosity between Ankara and Washington appeared to escalate. The U.S. dollar also extended gains to touch a fresh 14-month high.
Turkey sharply ramped up its tariffs on some U.S. imports such as cars, alcoholic drinks, rice and cosmetics, according to media reports citing the country’s Official Gazette.
Even so, the Turkish lira USDTRY, -4.8486% rallied against the dollar and the euro EURTRY, -5.0747% One dollar bought 6.0725 lira, down from 6.3544 late Tuesday in New York, dropping more than 4% thus far Wednesday. Meanwhile, a euro bought 6.8682 lira, versus 7.1904 lira in the previous session, also a decline of more than 4%.
The lira’s recent tumble has been spurred on in part 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, exacerbating the Turkish lira’s plunge.
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“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 note.
However, some currency analysts have argued that the lira might be oversold by now. The Institute of International Finance said the lira was “now significantly undershooting” fair value in a report earlier this week. On a conference call today discussing the situation in Turkey, IIF economists put the dollar-lira pair’s fair value at 5-5.50 lira, based on Turkey’s current account deficit.
Meanwhile, the dollar has extended its climb to a fresh 14-month peak, as measured by the ICE U.S. Dollar Index DXY, +0.25% which was up 0.1% to 96.857. The gauge, which measures the buck’s strength against a half-dozen rivals, has climbed about 0.5% so far this week and has rallied 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, +0.05% which measures the greenback’s strength against 16 peers, including the lira, was little changed in positive territory at 90.41.
The dollar index’s gains have come amid a steady deceleration in momentum for the euro EURUSD, -0.2557% and the British pound GBPUSD, -0.3773% Th euro last bought $1.1316, a level not seen since June 2017, while the sterling fetched $1.2687 versus $1.2721 in the prior session.
“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 comes after the Bank of England raised interest rates 25 basis points to 0.75% on Aug. 2, citing building inflationary pressure.
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