Lira plunges more than 7% as Türkiye edges towards free market

Türkiye's lira plunged 7.6 per cent to a record low on June 7 in its biggest selloff since the historic 2021 crash, and traders called it a "strong signal" that Ankara is moving away from state controls toward a freely traded currency.

The lira has come under increasing pressure since President Tayyip Erdogan was re-elected on May 28. It was trading at 23.2300 against the dollar at 1739 GMT, after touching a record low of 23.2620, bringing losses this year to nearly 20 per cent.

Under Erdogan's unorthodox programme, authorities have taken a hands-on role in foreign exchange markets, using up tens of billions of dollars of reserves this year alone to hold the lira steady. The central bank's net forex reserves hit an all-time low of negative $4.4 billion last month as demand surged through the elections.

But Erdogan signalled a U-turn at the weekend when he named Mehmet Simsek, a former deputy prime minister who is well regarded by foreign investors, as finance minister. Simsek later said the economic policy needed to return to "rational" ground and on Wednesday said there were "no quick fixes" for policy.

Four traders said the decline in the central bank's forex and gold reserves had stopped as of last week and could begin to recover, along with signs of the change in forex policies.

Though many regulations need to be changed, "the destination is becoming clearer every day: We are going towards the lira's value being determined by market conditions," one trader said.

Erodgan is considering appointing Hafize Gaye Erkan, a US-based senior finance executive, as central bank governor, Reuters reported on June 5. She would succeed Sahap Kavcioglu, who has spearheaded Erdogan's rate-slashing drive since 2021.

Given the heavy selloff, some analysts said the central bank might hold an emergency meeting to hike interest rates.

An emergency hike "is very possible (and) could stabilise markets in the short-term," said Ulricht Leuchtmann, head of FX research at Commerzbank.

"It smells like the beginning of a lira crisis," he added. "This is what happens when you get an exponential move - for a long time you think nothing happens, and then all of a sudden all hell breaks loose."

The bank's next policy meeting is scheduled for June 22.

Some analysts expect the lira to weaken towards a range of 25-28 against the dollar.

Another trader said the currency was nearing levels at which it "will not need to be defended with reserves," adding that sharp intraday losses could continue for some time.