Turkey’s lira slid 0.5% on Wednesday, breaking through what traders called a key support level of 5.85 against the dollar, after Turkey launched a military operation targeting Kurdish fighters in northeast Syrian.
The lira traded at 5.8660 at 1542 GMT, its weakest intraday level since August as worries grew about the fallout from the conflict and any reaction from Washington including possible sanctions.
The currency was on track for its weakest close since June.
The lira, which closed on Tuesday at 5.8350, has come under heavy pressure this week since the White House announced US troops would begin withdrawing from the Syrian region near Turkey’s border.
Just days after US troops pulled back from the area, Turkey on Wednesday launched aerial and artillery strikes targeting Kurdish YPG positions around the border town of Ras al Ain.
Risks
S&P Global Ratings said the military deployment raised risks for the lira and Turkey’s balance of payments, which has improved markedly since a currency crisis last year tipped its economy into recession.
Traders told Reuters that Turkish state banks had been selling dollars over the last three days to stop the lira from sliding beyond 5.85, a level it approached but did not breach this week until President Recep Tayyip Erdogan announced the incursion.
One trader estimated that the banks may have sold a total of $3.5 billion this week, including $1 billion on Wednesday alone, to support the lira.
“5.85 is the level,” said another trader, before it was breached on Wednesday.
The Treasury could not be immediately reached for comment about any possible interventions.
Last year’s crisis chopped some 30% off the value of the lira, which is down another 10.8% this year.
In the days before nationwide local elections on March 31 this year, Turkey directed its state banks to withhold lira liquidity from London’s overnight swap market, sources said at the time.
“State-owned banks have been allegedly selling dollars around 5.85/84, but they have not been able to prevent a break higher amid rising geopolitical risk,” said Piotr Matys, Rabobank’s emerging markets strategist, adding that the next key technical level was around 6.00.
“The response from Washington will be critical,” and Turkey’s central bank may eventually have to “seriously consider” raising interest rates to defend the lira, he added.
The lira weakened as far as 5.8465 on Tuesday before closing slightly stronger. On Monday it again approached 5.85, weakening as far as 5.8440.
The currency has been pulled in both directions this week by comments from US President Donald Trump.
A day after warning he could “obliterate” Turkey’s economy if it went too far in its Syria operation, Trump tweeted on Tuesday that Ankara was a “big trading partner” of the United States and had been “good to deal with”.
The extensive area of Ankara’s planned incursion into Syria could lead to months of military activity that raises concern in the markets, dealers say.
Turkey’s sovereign dollar bonds declined, with longer-dated issues suffering the most. The 2045 bond slipped 1.1 cents to a two-week low, Tradeweb data showed.
