The value of the Turkish Lira depends on FED decision

The value of the Turkish Lira depends on FED decision

Whether or not the fall in the value of the Turkish Lira will continue is going to be determined by the U.S. Federal Exchange (FED) decision, expected to be announced today. As a matter of fact, not only the lira, but the values of the national currencies of all developing countries are dependent on today’s FED decision.

Right now in the markets, it can be seen that the possibility of the cutting down of around 10 to 15 billion dollars of the FED’s $85 billion monthly bond-buying program is being priced to a great extent. In other words, we can say that the markets have already bought such a decision in advance: In the event that such a decision is made, the dollar exchange rate that is navigating at around 2 liras is expected to remain at its same level. Also according to the Turkish Central Bank Monetary Policy Board’s decision, it is expected that the dollar exchange rate, in the event of such a decision being made, will steer between 1.97 and 2 liras in the short term. 

In the event of a decision stating that the FED will increase its buying level, it is expected that the rise in the dollar exchange rate will accelerate; in other words, the Turkish lira will lose value again. Such a decision is estimated as a low probability but, again, it is possible. 

When we review expectations in the markets, we can see that one option is that a new decision is made on the 6.5 percent unemployment rate that the FED has set for an increase in interest rates. Market actors, who are reminding that the 6.5 percent unemployment rate is being approached, are saying that if the unemployment rate is lowered from 6.5 percent to, for example, 6 percent, then the possibility of an increase in interest rates would be postponed. This will be positive for Turkey as well as for all developing countries, they say, and that in this case the lira will gain value; in other words, the exchange rates will fall. 

As a result, FED decisions will determine the course of the market in the coming period. In other words, the return of developed countries to contractionary monetary policies after the crisis will continue to affect Turkey, as well as all developing countries that currently enjoy an abundance of money. 

The effect of politics on the economy 

It is apparent that Turkey is affected more negatively by recent international financial developments when compared to other developing countries. While one reason for this is its high current account deficit, in other words an economic problem unique to us, another significant issue is the increase in the atmosphere of social conflict.

It can be seen that, in Turkey, the risks of the current account deficit and political fragility are continuing. For this reason, maybe the FED decisions will be a determining factor in the value of the lira, but besides that, a solution to our own unique economic and political problems will also have a serious share in the value of the lira. 

The extent to which the democracy package that the government is set to release, within the context of the resolution process, satisfies the Kurdish side, and correspondingly, whether or not military actions and attacks increase, also constitute a significant place within political matters. In addition, the continuation of the political tension with Syria and the possibility of a close conflict are also among the political factors affecting the value of the lira. 

In other words, the value of the lira, as Central Bank Governor Erdem Başçı has said, has evolved into a parameter that is hard to estimate.