Investing.com - The dollar fell more than 3% against the Turkish lira on Wednesday after Turkey’s central bank unveiled a series of dramatic rate hikes at an emergency monetary policy meeting overnight.
USD/TRY hit 2.1735, the lowest since January 13 and was last down 3.21% to 2.1797. The pair rose to a record high of 2.3895 on Monday.
Turkey's central bank raised its overnight lending rate to 12% from 7.75%, raised its one-week repo rate to 10% from 4.5% and raised its overnight borrowing rate to 8% from 3.5%.
In its rate statement, the bank said its new “tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook”.
The move exceeded market expectations and eased concerns over the broad based selloff in stocks and emerging market currencies in recent sessions, triggered by worries over the impact of cuts in Federal Reserve stimulus and concerns over a possible slowdown in China.
The lira had fallen to a series of record lows against the dollar since the beginning of the month, dropping almost 11%, before rebounding ahead of the emergency central bank meeting on Tuesday.
The central bank left rates unchanged at its scheduled meeting last week, amid political pressure to avoid higher borrowing costs, which could act as a drag on growth. The lira continued to spiral to record lows after a direct currency market intervention by Turkey’s central bank on Thursday failed to stem the steep depreciation in the currency.
Turkey’s lira is seen as particularly vulnerable to reductions in the Fed’s asset purchase program, as the country relies heavily on foreign investment to fund its huge current account gap.
The selloff in the lira was also fuelled by investor concerns over local political tensions after a wide ranging corruption probe launched in December focusing on figures close to the government forced a cabinet reshuffle.
The lira remained vulnerable ahead of Wednesday’s policy statement by the Fed amid expectations that the bank will cut its asset purchase program by another $10 billion, to $65 billion per month. The central bank announced the first cut to its stimulus program in December.
The lira was also sharply higher against the euro, with EUR/TRY down 2.57% to 3.0005, after rising to record highs of 3.2729 on Monday.