What's Causing The Recent Fluctuations In The USD/TL Exchange Rate?

The Turkish Lira (TL) has recently seen a notable appreciation against the US dollar (USD). For Turkish investors and businesses that conduct trade or travel internationally, fluctuations in the USD to TL exchange rate can have significant impacts.

This article will analyze recent trends in the USD to TL rate and discuss likely factors driving the Lira’s fluctuations.

USD to TL Exchange Rate

The highest and lowest rates have an upward trend, indicating that the Turkish Lira will weaken against the US dollar from November 2023 to January 2024.

Specifically, the highest rate increased from 28.8050 on 11/05/2023 to 30.4055 on 01/07/2024. This reflects a 5% depreciation of the TL against the USD in just two months.

The lowest rate similarly increased from 28.2150 to 29.9096 over the same period. Within the time frame, there are some weekly fluctuations in the exchange rate, but the overall direction is upwards.

The most significant weekly change occurred between 12/24/2023 and 12/31/2023 when the highest rate jumped from 29.7336 to 29.9750.

It implies that the TL faced heavy selling pressure, leading to a sharp devaluation against the USD that week.

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Factors Driving the Turkish Lira Volatility

With the Lira gaining ground versus the dollar since November, what’s causing this move? Several factors likely contributed to the TL’s fluctuations over recent months:

1. Improving Economic Fundamentals in Turkey

Turkey’s economy has been on the path to recovery after a currency crisis in 2018. The country’s GDP grew 5% year-over-year in the first quarter of 2022.

Unemployment has fallen to under 10%. And the government budget deficit narrowed significantly in 2021. It’s important to note that the effects of certain factors that occurred in previous years may take a long time to manifest in the current year.

With the economy on firmer footing, investor sentiment towards the Lira has improved, leading to currency gains. The Central Bank of Turkey also built up sizable foreign exchange reserves last year, helping defend the Lira’s value.

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2. Rising Interest Rates from the Central Bank

Turkey’s central bank raised benchmark interest rates to combat high inflation with 42.5% in 2023. Higher interest rates make depositing money in Lira accounts more appealing, boosting demand for the currency.

The central bank has held rates steady in late 2023 rather than continuing an aggressive easing cycle. This stance has supported the lira exchange rate. The bank likely wants to avoid excessive lira weakness that could spark faster inflation.

3. US Dollar Weakness Against Global Currencies

As the Turkish Lira rallied over the past two months, the US dollar slumped over most major currencies. The dollar index, which tracks the greenback’s value against a basket of other currencies, dropped over from its September highs.

Dollar softness has been driven by lower US interest rates and recession worries, which dented the currency’s safe-haven appeal. As the dollar slid globally, reduced demand for dollars contributed to the Lira’s appreciation against the USD.

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4. Energy Price Declines Offering Turkey Relief

As an energy-importing country, Turkey’s trade balance has suffered from elevated oil and natural gas prices over the past year. However, falling global energy costs since mid-2022 have begun relieving the nation’s import bills and current account deficit.

Lower energy import costs reduce downward pressure on the Lira, resulting from imbalances in Turkey’s dollar-denominated trade flows. This provides fundamental support for the currency’s value.

Impacts on Turkey’s Economy

The USD to TL exchange rate since November 2023 has notable implications for Turkey’s economy and financial markets:

• Improved Purchasing Power - A stronger Lira reduces prices on imported products for Turkish consumers and businesses. This boosts people’s purchasing power, especially for oil, electronics, and machinery.
• Supporting Inflation Fight - Lira strength helps lower imported inflation, a major priority for policymakers. But currency appreciation can also dampen export competitiveness, slowing economic growth. The central bank must balance these dynamics.
• Potential Tourism Boost - With each dollar converted to fewer Lira, Turkey has become more affordable for foreign tourists. Growing tourism revenues would aid Turkey’s economic growth and current account position.
• Valuation Impact on Foreign Investors - Foreign investors in Turkish stocks and bonds see returns reduced when converting lira assets back into dollars, as has occurred in recent months. This could discourage inflows in the future.

Outlook for the USD/TL Exchange Rate

Looking ahead, where could the USD/TRY exchange rate be headed? Much will depend on factors like Turkey’s policy mix, global growth, and the fortunes of the US dollar.

If Turkey’s central bank keeps interest rates steady and inflation continues declining, Lira gains could persist soon. However, aggressive future rate cuts or surging inflation would weigh the currency.

Broader dollar trends will also impact the pair. If the dollar resumes its climb against other major currencies, lira depreciation pressure could reemerge.

But with Turkish economic activity holding up better than many other countries, the Lira may avoid sharp declines. The USD to TL rate will likely remain between 29 and 31 in the coming months, barring unforeseen volatility.

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In conclusion

A mix of domestic economic factors in Turkey and global dollar weakness has driven the recent appreciation of the Turkish Lira against the US dollar.

For Turkish Forex traders exposed to exchange rate risk, the Lira’s fluctuations highlight the importance of hedging and closely monitoring currency markets.

While the Lira has rebounded from its 2018 crisis lows, risks remain that could spark renewed volatility in the current year.

Traders should continually educate themselves on the fundamentals influencing currency valuations and exercise prudent risk management when trading forex.

Before putting capital at risk, learn about macroeconomic trends, central bank policies, geopolitics, and technical signals that drive exchange rate movements.

With knowledge and effective risk control, traders can better navigate forex market volatility.

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