Currencies: Dollar index jumps to around one-year high as Turkey’s lira gets rocked to new low

Turkey’s lira grabbed the attention of currency traders Friday, skidding some 7% against the U.S. dollar to a new historic low as fears grow that the country’s problems could infect Europe.

Meanwhile the U.S. dollar strengthened to its firmest level in more than a year against major rivals.

The Turkish lira USDTRY, +9.5316%  slumped 7.5% versus the U.S. dollar, with the buck fetching 5.9668 compared with 5.5426 late Thursday in New York. The lira has consistently hovered around historic lows throughout the summer but has fallen more than 16% this week alone, according to FactSet. The lira’s second-most important cross against the euro EURTRY, +8.7563%  saw similar price action, and one euro bought 6.8326 lira, up 7%, according to FactSet.

The steep decline in the Turkish currency came after the European Central Bank expressed concerns about potential contagion from Turkey’s problems, especially in the banking sector, according to a report from the Financial Times (paywall).

The country — where President Recep Tayyip Erdogan was re-elected in a snap vote in June and whose growing power has raised questions about the independence of the country’s central bank — is struggling with double-digit inflation and its reliance on foreign funding. With much of its debt denominated in U.S. dollars, the stronger buck has added weight to its debt burden.

Analysts and investors have also attributed the relentless pressure on the Turkish currency to a growing diplomatic spat between Washington and Ankara over the detention of a U.S. pastor in Turkey.

Read: Here’s why there may be more pain in store for Turkey’s lira

Later on Friday, Turkey’s government will outline a “new economic model,” according to a report by AP.

“For some days, global markets have noted the Turkish lira’s plunge with more curiosity than concern, seemingly viewing it as Turkey’s problem and no one else’s,” said Sean Callow, currency strategist at Westpac. “That seems to have changed.”

Turkey’s limited stash of currency reserves could prompt it to seek a bailout from the International Monetary Fund, said Paul McNamara, investment director for emerging market debt at GAM International Management.

Read: Another stock market risk: GDP growth is slowing across the globe

The ICE U.S. Dollar Index DXY, +0.54% which gauges the dollar against a half-dozen monetary units, surged amid the turmoil, and recently was up 0.6% at 96.046, it’s highest level since July 2017.

The euro EURUSD, -0.5900% the most significant component of the dollar gauge, tumbled against the greenback, highlighting the spillover effect of Turkey’s dilemma on European markets. One dollar bought $1.1455 compared with $1.1526 late Thursday in New York.

Declines continued for other big losers this week, such as the New Zealand dollar USDNZD, +0.2576% which fell to its weakest level since March 2016 on Thursday on the back of its dovish-sounding central bank, and the Russian ruble USDRUB, +0.4554% which dropped on sanction worries.

Also check out: Russian ruble drops to 2-year low as further sanctions spell trouble

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