A plunge in the Turkish lira rocked global equities and emerging markets on Friday and fear of more turmoil sent investors scurrying for safety in assets like the yen and U.S. government bonds after President Donald Trump doubled U.S. tariffs on metals imports from Turkey.
The lira fell as much as 18 percent against the dollar in its worst day since Turkey’s financial crisis of 2001. It followed a deepening rift with the United States, worries about its own economy and lack of action from policymakers.
Bank shares across Europe fell and the euro slipped to its lowest since July 2017 as the Financial Times quoted sources as saying the European Central Bank was concerned about European lenders’ exposure to Turkey.
The dollar rose as exposure to Turkey could impact European banks and spark a domino effect throughout Europe as people begin to pull out of those banks and into the U.S., said Gregan Anderson, macroeconomic strategist at brokerage Bulltick LLC.
Wall Street opened lower. The Dow Jones Industrial Average fell 185.15 points, or 0.73 percent, to 25,324.08. The S&P 500 lost 14.92 points, or 0.52 percent, to 2,838.66 and the Nasdaq Composite dropped 36.64 points, or 0.46 percent, to 7,855.15.
Investors piled into “safe” government debt, with German yields hitting three-week lows and the yield on the benchmark U.S. 10-year Treasury note falling to 2.88822 percent.
The safe-haven Japanese yen hit a one-month high of 113.38 against the dollar.
The dollar index, which measures the greenback’s strength against a group of six major currencies, breached 96, taking it to its highest level since July 2017. It was last up 0.7 percent at 96.173.
President Tayyip Erdogan told Turks to exchange gold and dollars into lira as the currency tumbled. The currency has fallen more than 40 percent this year, fanning worries about a full-blown economic crisis.
Trump intensified his spat with Ankara with the higher tariffs, putting unprecedented economic pressure on a Nato ally and deepening the financial turmoil.
Criticizing the state of the U.S. relationship with Ankara, Trump announced on Twitter that he had authorized a doubling of duties on aluminium and steel, making them 20 percent and 50 percent respectively. “Our relations with Turkey are not good at this time!” he said in an early morning post.
The White House said later that Trump had authorized his administration to prepare documents imposing the increased duties under a section of U.S. law that allows for tariffs on national security grounds.
“I have just authorized a doubling of Tariffs on Steel and Aluminium with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar!” Trump said in an early morning post on Twitter.
Erdogan’s characteristic defiance in the face of the crisis has further unnerved investors. The president, who says a shadowy “interest rate lobby” and Western credit ratings agencies are attempting to bring down Turkey’s economy, appealed to Turks’ patriotism.
“If there is anyone who has dollars or gold under their pillows, they should go exchange it for liras at our banks. This is a national, domestic battle,” he told a crowd in the northeastern city of Bayburt. “This will be my people’s response to those who have waged an economic war against us.”
“The dollar cannot block our path. Don’t worry,” Erdogan assured the crowd.
That is unlikely to mollify investors who are also worried by the growing dispute with the United States.
The US, the world’s biggest steel importer, imposed tariffs of 25 percent on steel and 10 percent on aluminium in March for imports from a variety of countries.
Since then, its relationship with Turkey, the sixth-largest steel importer to the US, has deteriorated, prompting Ankara to send a delegation this week to Washington to meet with both the State and Treasury Departments. But those talks on Thursday showed no signs of breakthrough.
Last week, the US imposed sanctions on Turkey’s justice minister and interior minister for not releasing American pastor Andrew Brunson.
Brunson, an evangelical Presbyterian pastor from North Carolina, was jailed for allegedly supporting a group that Ankara blames for an attempted coup in 2016. Brunson denies the charge. His cause resonates with Christian conservative supporters of Trump, who could also be influential as Republicans seek to retain control of Congress in midterm elections in November.
Turkey, home to the Incirlik air base which is used by U.S. forces in the Middle East, has been a NATO member since the 1950s and a close ally of the United States.
Washington is seeking the release of three locally employed U.S. embassy staff. Trade issues and differences over Syria have also strained bilateral ties.
Turkey also wants the United States to extradite Fethullah Gulen, a Pennsylvania-based Muslim cleric who Turkish authorities say masterminded the coup attempt against Erdogan in which 250 people were killed. Gulen denies the allegation.
The turmoil makes it difficult for global investors to justify remaining in Europe and it is also negative for emerging markets, and the lira’s relentless depreciation drives up the cost of imported goods from fuel to food for ordinary Turks, and not only Turks but Turkish Cypriots in the north of the island.
In Famagusta, a popular roast chicken seller hiked his prices from 15TL to 18TL on Friday, and didn’t rule out a further increase in the coming days.
For some in the north, the currency meltdown has been an unexpected windfall. Thousands of African and Middle Eastern students – subsidized by dollars wired to Turkish banks from family abroad – are suddenly enjoying a lira bonanza.
For foreign tourists, benefits are being found when out shopping or in restaurants – but most car-hire deals, boat trips and other excursions, as wells as many hotel bars, charge in either euros or sterling.
The crossing point at Ayios Nikolaos has a long queue back into the Republic, past SBA customs, as many locals from the east took advantage of the crisis to go shopping at the huge Lemar hypermarket.