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September 24, 2017

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Plunge in lira amplifies Turkey economy fears

ISTANBUL -- Will it ever end? Turks have over the past three months nervously watched the steady decline in value of the Turkish lira against the dollar, seeing it hemorrhage more than 10 percent in the past month alone.

The central bank last week stepped in with an unexpected hike of 50 basis points in its leading rate, but economists doubt whether even tighter monetary policy will be enough to halt the currency's decline.

"The more the dollar increases, the less we do business here," complained Mehmet Semih Ozdemir, looking for customers at his clothes stall at the Istanbul bazaar.

"Some days we have no client. Others just a few. It's hard to make ends meet," he said.

The currency has been buffeted by fears over Turkey's economic performance, with growth expected to have slowed in the third quarter this year and the high current account deficit a persistent risk factor.

But there are also political concerns in the wake of the July 15 failed coup, with investors fretting over the magnitude of a subsequent crackdown, fraying relations with the European Union and the consequences of President Recep Tayyip Erdogan's dash for a presidential system.

Completing a perfect storm, the international context is also stacked against the lira, with the dollar surging on the prospect of higher U.S. interest rates and protectionism after the election of Donald Trump.

'Reforms in limbo'

In a sign of the tough ride ahead, the rate rise gave the currency only brief support, which was hours later wiped out as the European Parliament voted to back a freeze in EU membership talks with Turkey.

"Against a widening current account deficit, despite slow growth and heightened political risks, the level of short-term rates is still too low to provide adequate cover for the Turkish lira," said Inan Demir of Nomura International.

He predicted that the unit, currently trading at 3.4 to the dollar — compared with 2.9 at the start of the year — would depreciate further to 3.65 in the next 12 months.

Seeking to reassure investors in a speech on Saturday, Prime Minister Binali Yildirim said Turkey had a "sound economy" and the current turbulence was a worldwide problem.

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