Turkish Lira Drops as Investors Question Efficacy of Interest Rate Cuts

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Turkish Lira Drops as Investors Question Efficacy of Interest Rate CutsThe Turkish lira fell to its weakest level since March while government bonds declined as investors speculated the sluggish economic growth indicates the central bank’s decision to lower interest rates isn’t boosting local demand.

The lira dropped 0.5 percent to trade at 2.2064 per dollar as of 3:55 p.m., Istanbul time, its lowest level since March 26. The yields on the 10-year bonds rose five basis points, or 0.05 percentage point, to 9.19 percent.

Turkey’s economy expanded 2.1 percent in the quarter through June, compared with the average estimate of 2.8 percent given by economists in a Bloomberg News survey. The central bank officials have lowered the target repurchase rate thrice since May after earlier raising it to 10 percent in January in order to curb further decline of the lira. The national statistics institute reported that gross domestic product shrunk 0.5 percent from the first quarter of 2014.

“The report reinforces market fears that several rate cuts over the past months failed to boost economic growth,” Ipek Ozkardeskaya, a Geneva-based currency strategist at Swissquote Bank SA, told Bloomberg News. “We are now left with pressures on domestic demand and investments. The long-term outlook for the lira concerns me.”

The lira’s three-month implied volatility rose the third straight day to 11.1 percent, the strongest advance on a closing basis since April 25.

Meanwhile, South Africa’s rand fell past 11 per U.S. dollar, a level last breached in February, on bets the Federal Reserve may raise interest rates sooner than expected.

The rand fell 0.3 percent to trade at 10.9555 per dollar at 1:31 p.m., Johannesburg time after earlier touching a low of 11.0162, its lowest level since Feb. 21.To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Yashu Gola at yashu@forexminute.com