Turkey Doubles Tariffs on US Goods

Turkey has just doubled tariffs on some US imports including alcohol, cars, and tobacco on Wednesday as a retaliatory response to the US’s moves. The lira has rallied even further after central bank’s liquidity moves had the effect of buoying the struggling currency.

Ankara acted in the wake of the increased tension between the United States and Turkey – two NATO allies – over the latter’s detention of Christian American pastor and other diplomatic issues that have contributed to the tumbling of lira to record rock bottom against the dollar.

The currency has dropped more than 40 percent against the dollar this year, pushed by concerns over Erdogan’s growing influence over the economy and his continual calls for lower interest rates despite soaring inflation.

The recovery of around 6 percent on Wednesday that briefly strengthened to less than 6.0 against the dollar came after the central bank spurred lira liquidity in the market, effectively pulling up rates and supporting the currency.

Optimism regarding better relations with the European Union after a Turkish court released two Greek soldiers pending trial and a banking watchdog’s step to limit foreign exchange swap transactions have also aided the lira.

“They are squeezing lira liquidity out of the system now and pushing interest rates higher,” said Christian Maggio, who is the head of emerging markets strategy at TD Securities. “Rates have gone upby 10 percent… the central bank has not done this through a change in the benchmark rates, but they are squeezing liquidity, so the result is the same.”

The lira steadied as far as 5.75 against the dollar on Wednesday and stood at 6.08 in a move that was initially triggered by the Turkish court decision on the Greek soldiers that were facing espionage cases against them.

A treasury desk trader at a bank said that this showed relations with the EU could recover “while tense relations continue with the USA.”

The lira was also supported by a step from the banking watchdog BDDK, which slashed the limit for Turkish banks’ forex swap, spot, and forward transactions with foreign banks to 25 percent of a bank’s equity.

“Remarkable turnaround,” said Tim Ash, who is Bluebay Asset Management senior emerging market analyst. “They are killing offshore lira liquidity to stop foreigners shorting the lira.”

The lira had already recovered about 8 percent on Tuesday over news of a planned conference call on Thursday. During the call, the finance minister will seek to reassure international investors.

A decree that Turkish President Tayyip Erdogan signed doubled tariffs on passenger cars to 120 percent, on alcoholic drinks to 140 percent, and on leaf tobacco to 60 percent. Goods such as cosmetics, rice, and coal were also slapped with increased tariffs.

The duties were raised in response to the US administration’s “deliberate attacks on our economy,” said Vice President Fuat Oktay on Twitter. Last Friday, US President Donald Trump stated that he had authorized higher tariffs on aluminum and steel imports from Turkey.

The United States was the fourth biggest source of imports to Turkey in 2017, accounting for $12 billion of imports, according to statistics. Turkey’s exports to the United States last year reached $8.7 billion, placing it as Turkey’s 5th largest exporter.

The US and Turkey have been locking horns over a wide range of topics, including diverging interests in Syria, Ankara’s ambition to buy Russian defense systems, and Andrew Brunson, who is a pastor on trial in Turkey for terrorism charges.

Trump has continually asked Brunson’s release, but Ankara stated that the decision up to the court. On Wednesday, a Turkish court in the Aegean province of Izmir, in which Brunson is on trial, rejected the pastor’s appeal to be released from house arrest.

An upper court has yet to rule on the appeal, according to Brunson’s lawyers.

Washington has threatened more economic pressures to come for Turkey if it still refuses to release Brunson, said a White House official.

Erdogan has stated Turkey is the target of an economic war, and has made repeated calls for Turks to sell their dollars and euros to spur the lira. On Tuesday, Erdogan said that Turkey would boycott US electronics products.

HQBroker Review