The sharp decline of the Turkish lira’s exchange rate against the US dollar has continued to drag down major currencies in the world, from the Indian rupee to the euro. Growing concerns that the fall in the Turkish currency would spread and affect the European banking sector.
By
·3 minutes read
LONDON, TUESDAY – The sharp decline of the Turkish lira’s exchange rate against the US dollar has continued to drag down major currencies in the world, from the Indian rupee to the euro. Growing concerns that the fall in the Turkish currency would spread and affect the European banking sector were the main factors causing the crisis in Turkey, economists said.
In trading on Tuesday (14/8/2018), the rupee exchange rate fell around 1.6 percent to 69.93 per US dollar. It was the currency’s largest single-day drop in five years. The rupee has lost about 8 percent of its value this year.
Indian Secretary of Economic Affairs Subhash Chandra Garg tried to calm the market. He said the rupee’s fall was mainly caused by external factors. He said there was nothing to worry about, as the pressure on the Indian currency was greater the previous day, which had pushed it down to 70.1 per US dollar.
Garg said that India\'s foreign exchange reserve was relatively sufficient to protect the rupee.
Meanwhile, the Turkish lira recovered on Tuesday to 6.60 per US dollar, up about 5 percent, strengthening after falling to 7.24 per US dollar at the beginning of this week – a historic low. The market responded positively to the steps Turkish financial authorities made to increase liquidity and the US dollar supply.
Tuesday’s recovery in the Turkish lira contributed to a rise in a number of currencies in emerging economies, such as the South African rand and the Mexican peso, which rose respectively about 1.6 percent and 1 percent against the dollar.
The euro, on the other hand, has dropped to its lowest level in the past 13 months, weakening 2.4 percent this month against the dollar.
ING London money market analyst Viraj Patel believed that the lir’sa strengthening was only short-term. There are concerns that the fall in the Turkish currency could lead to global fund outflows from developing countries. The current account deficit and dependence on foreign investors are among global investors’ concerns.
Investors\' concerns about Turkey emerged in July, when President Recep Tayyip Erdogan appointed his son-in-law, Berat Albayrak, as finance minister, while eliminating two senior figures considered to have intimate market knowledge.
The right policy
In Indonesia, the pressure on the Turkish economy is expected to impact this week’s movement of the Jakarta Composite Index (JCI), the main price indicator on Indonesian stocks. The right monetary policy is needed to convince investors to bring their funds back to the country.
On Tuesday, the JCI fell 91.37 points (1.55 percent) to 5,769.87. The day before, the JCI weakened 3.55 percent to close below the 6,000 level. Foreign investors pulled net sales of Rp 781.81 billion out of the local market. Foreign investors have posted net sales of Rp 50.18 trillion this year to date.
CSA Research Institute senior analyst Reza Priyambada said that foreign investors were leaving the Indonesian capital market upon fears that the crisis in Turkey could spread to Indonesia. The rupiah depreciation, decline in foreign exchange reserves, widening current account deficit, and slowdown in second-quarter investment realization have further added to investor concerns.
Separately, Investa Saran Mandiri director Hans Kweel said that if the rupiah’s volatility could be controlled, the market could be corrected and the JCI would rise again. He said investor perceptions must be improved, because the Indonesia’s economic condition was much better than Turkey. Indonesia\'s current account deficit in the second quarter had indeed reached 3 percent of GDP, but Turkey\'s current account deficit was worse at about 5.5 percent of GDP