Turkey's lira sank to new lows on Monday as tensions between Ankara and the West combined with unconventional monetary policy and rising inflation.
The lira fell more than 2%, closing in on 10 to the dollar - a level it has never hit - after President Recep Tayyip Erdogan said he had ordered the expulsion of the ambassadors of the United States and nine other Western countries for demanding the release of philanthropist Osman Kavala.
Kavala has been charged with financing nationwide protests in 2013 and for involvement in a failed coup in 2016.
Lira volatility gauges jumped, dollar bonds fell, local 10-year yields moved closed to three-year highs hit last week, flirting with the 20% level.
Turkey's tension with NATO allies over Kavala comes amid heightening worries about government interventions in monetary policy, taking 2021 losses for the lira to about 24%, the worst performance among emerging market peers by a significant margin.
"If politicians make foreigners the bogeyman, it is easier to sell the pressures created by the weak lira as the price to be paid for political autonomy. That also means: a monetary policy U-turn seems less likely now. And that is bad news for the lira," said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.
Turkey's state lenders Ziraat Bank, Vakifbank and Halkbank lowered their loan rates by up to 200 basis points according to the products and maturities, they said in a joint statement on Monday, following last week's central bank policy easing.