Turkish lira drops to 5-month-low vs U.S. dollar, stocks fall sharply

The benchmark 100-index of the Istanbul Stock Exchange traded over 4 percent down on Friday ahead of a crucial vote by U.S. lawmakers on a revised rescue bill, while the yield on the April 14, 2010 benchmark bond rose nearly to 20 percent.

 

The U.S. dollar also gained against the lira and rose over 1.30.

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It was the first trading after a three-day religious holiday during which the stock exchange remained closed and escaped the jitters that shook global markets after the U.S. House of Representatives rejected an initial rescue plan on Monday.
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The House was to vote later Friday on a revised plan to spend 700-billion-dollars (505 billion euros) to ease the turmoil.
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The head of the Istanbul stock exchange, Huseyin Erkan, said fluctuations at the Turkish market would continue even if the plan was approved, but stressed that the Turkish economy was resilient, the Anatolian Agency reported.
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"Turkey’s basic indicators are still very strong," he said, pointing out that Friday’s losses came amid a low trading volume.

 

Emerging-market bonds, stocks and currencies fell on concern that the U.S. bank rescue plan would not stave off recession in the world's biggest economy.

 

Financial analysts however said the approval of the bailout plan would give a positive impetus to the markets and create an upturn in trade on Monday.

 

"...The approval of the U.S. House is required to end the growing problem and get rid of all types of problems... If the House approves the plan we can see 'Green Monday' after 'Red Friday'," Gokhan Uskuay, a financial strategy manager at Turkish Yatirim brokerage said.

  

BANK DEPOSIT GUARANTEES STABLE
Turkey plans to maintain the current level of bank deposit guarantees, Prime Minister Tayyip Erdogan said on Friday, in the wake of Ireland's move to guarantee all bank deposits. Turkey guarantees up to 50,000 lira ($39,030) of bank deposits per person.

 

"We want to maintain the current deposit guarantee limit. If there is a problem it will come onto our agenda," Erdogan told a news conference.

 

Amid the current global financial turmoil, Turkish banks are viewed as better placed than many European and U.S. rivals because of strong balance sheets and limited foreign exposure.

 

"It seems that the current deposit guarantee limit does not require an increase at this time, when we take the responsibilities that banking system puts on us into consideration," Ahmet Erturk, head of Savings Deposit Insurance Fund (TMSF) also said in a televised interview on NTV broadcaster.

 

On Thursday, Ireland passed into law an emergency plan guaranteeing Irish bank liabilities of 400 billion euros ($558 billion) to shore up confidence in its financial system.

 

That plan guarantees the deposits and debts of six Irish-owned banks for the next two years.

DOLLAR STRONGER VS EURO

The dollar surged to fresh one-year highs against the euro and a basket of currencies after the European Central Bank president, Jean-Claude Trichet said inflation risks have diminished as he expressed worries about weaker economic growth in the eurozone.

 

His comments suggested the ECB may have to cut interest rates to 4 percent next month, from the current 4.25 percent. That should diminish the appeal of eurozone assets and reinforce the dollar's bull trend that has been in place since August. Investors are now looking at $1.3300 as the next target for the euro, from a record high of $1.6038 seen in July.

 

"The situation in Europe, though the ECB's monetary policy has not yet capitulated, will likely pressure the euro through year-end. And if the dynamics supporting the dollar really gain momentum, a serious capitulation among dollar bears could extend dollar strength well into 2009 and bring the euro all the way down to earth," Jack Crooks, president of foreign exchange advisory firm Black Swan Capital in Palm City, Florida, told Reuters.

 

Over the last two months, the dollar has benefited from a broad sell-off of cross-border assets by U.S. institutions particularly in their emerging market portfolios, spooked by fears that economic weakness could spread to these economies.

 

But more recently, the dollar has gained support after several European banks had to be bailed out, highlighting the international nature of the credit crisis and undermining the euro and pound.

 

EUROPE'S WEAKNESS

The weak state of Europe's financial sector, the extraordinary tightness in money markets has also been dollar-supportive. On Thursday, London interbank offered rates for overnight dollars eased to 2.68125, from a record one-day jump to 6.8750 two days earlier, but banks remained reluctant to lend to each other as they fretted over counterparty risks.

 

With global business transactions still carried out in dollars, frozen money markets have underpinned the U.S. currency as bank and funds jostled to buy dollars in the open market because they cannot borrow in the interbank sector.