© Bloomberg. A customer counts Turkish lira banknotes after visiting a currency exchange in Istanbul, Turkey, on Friday, March 16, 2018. Photographer: Kostas Tsironis/Bloomberg
(Bloomberg) — The fell against the dollar for a sixth day and government bonds dropped as a showdown with the U.S. over a detained American pastor continued to weigh on investor sentiment.
The currency weakened 1.1 percent to a record low amid its longest streak of losses in three months, while the yield on bonds touched an all-time high. The lack of liquidity in the lira market and broad dollar strength are compounding the move, according to an Istanbul-based trader who asked not to be named as they are not authorized to speak publicly.
While President Recep Tayyip Erdogan said on Saturday that Turkey will respond in kind to the U.S. decision to sanction two government ministers, speculation that the dispute will eventually be resolved has increased. Erdogan said he believed that the two NATO partners will “leave behind a major chunk of differences” soon, a sign that a breakthrough in one of the worst diplomatic crises between the nations is possible.
“It’s worth noting that Erdogan has been trying to use very careful language as much as he can,” analysts at Global Securities in Istanbul, including the head of research, Sertan Kargin, wrote in a note to clients. “It seems there is still room for a diplomatic exit, although more time and effort are needed to bridge the gap between the two countries. Should this be the case, lira assets could recover strongly and swiftly.”
The lira is already under pressure from one of the largest current-account deficits in emerging markets, and the risk that U.S. President Donald Trump makes good on his pledge to impose large sanctions on Turkey if it doesn’t release pastor Andrew Brunson is further undermining confidence.
The currency has weakened more 25 percent against the dollar this year, hampering the ability of companies to repay their foreign-currency loans, stoking inflation and putting pressure on the central bank to keep raising rates. The bank is next scheduled to meet on Sept. 13.
The lira was 0.6 percent weaker at 5.1136 against the dollar as of 10:43 a.m. Istanbul time after earlier touching 5.1419 per greenback. The yield on 10-year government bonds jumped as much as 49 basis point to 19.68 percent.
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