The Turkish lira plummeted to record lows against the pound, euro and US dollar today amid concerns it could become embroiled in a fast-escalating conflict in the Caucasus.
One British pound is currently worth 10.06 Turkish lira, down from 9.78 last week, a huge decline from its 3.5 value of four years ago. The Turkish lira also slid 2% against the dollar, with one dollar equal to 7.8 lira.
It marks the worst day for the Turkish currency since early August, when it suffered record lows.
The latest devaluation erases the gains the currency made last week, when Turkey’s Central Bank made a surprise intervention, raising interest rates by two percentage points to 10.25%. The increase in interest rates – the first in two years – helped to stabilise the lira and inflation.
However, the currency came under new pressure as news grew of Turkey’s involvement in the fighting between Armenia and Azerbaijan over Armenia-occupied Nagorno-Karabakh.
Turkish media confirmed Azerbaijan has been using Turkish drones over the weekend in retaliation to shelling by Armenia, while Ankara has openly sided with its Turkic neighbours.
The clashes over the weekend were among the worst between the two former Soviet Union states since 2016, with fears growing that it will turn into a full-scale war.
Timothy Ash, an emerging market sovereign strategist at BlueBay Asset Management, tweeted:
“Conflict in Nagorno-Karabakh also driving TRY weakness today, amid concern Turkey gets dragged into conflict on side of Azerbaijan with Russia which backs Armenia. Russia arms both sides!
Conflict in Nagorno-Karabakh also driving TRY weakness today, amid concern Turkey gets dragged into conflict on side of Azerbaijan with Russia which backs Armenia. Russia arms both sides! https://t.co/ZcqREhf9RW
— Timothy Ash (@tashecon) September 28, 2020
Turkey has only just emerged from the Eastern Mediterranean crisis, which threatened to explode into armed conflict as Greece stepped up its challenge to Turkey over disputed maritime territorial waters and exclusive economic zones. International pressure helped to ease tensions between the two NATO allies.
Having avoided one regional conflict, Turkey now finds itself caught up in new geopolitical concerns. At least 21 people were killed on Monday in the second day of heavy clashes between Armenia and Azerbaijan.
The tensions on Turkey’s doorstep have been reflected in market speculation over the strength of its currency.
The lira has been among the worst performers this year, driven by ongoing worries about Turkey’s depleted foreign exchange reserves and sharply negative real interest rates due to high inflation.
The latest depreciation in the Turkish lira means the currency has shed half of its value in under three years.