USD/TRY crashes 25% from earlier highs to 13.50 as Ergodan announces new anti-dollarisation policy

• Erdogan announced an unorthodox new policy to compensate losses on domestic TRY accounts due to TRY/USD depreciation.
• Traders said the policy amounted to “hidden” rate hikes, funded via the public purse, and USD/TRY crashed 25% from highs.
• The pair is now trading in the 13.50 area having been as high as the 18.30s earlier in the session.

The Turkish lira underwent a jaw-dropping recovery on Monday after Turkish President Recep Erdogan announced unorthodox new policies to alleviate the impact of exchange rate volatility on Turkish savers. The President announced a raft of new economic measures, but the one that got the most attention was a mechanism where the government will offset losses to domestic TRY accounts as a result of the depreciation of the TRY/USD exchange rate. Some analysts and traders have said that these anti-dollarisation measures amount to a “hidden” interest rate hike, funded via the public purse.

According to Bloomberg, the USD/TRY spot rate is currently at 13.50 a staggering near 20% decline from last Friday’s closing levels around 16.40. The decline is even more impressive given that USD/TRY was at one point trading in the 18.30s. That means the lira has gained 25% in value from its intraday lows.

Judging by the market reaction, President Erdogan appears to have pulled a rabbit out of the hat with his latest policy of essentially paying additional interest to Turkish savers via the public purse. But Turkey is very much in unprecedented territory when it comes to monetary policy right now. The government has taken on a potentially huge liability in promising to insure savers against exchange rate losses and analysts will be wondering how this impacts the government’s fiscal position going forward. Some have pointed out that the Turkish government has now exposed itself to a vicious cycle where, if the value of the lira falls too much, they will have to borrow ever more of it to fund the losses of investors.