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Turkey ETF Plummets on Mounting Lira Concerns

This article was originally published on ETFTrends.com.

The Turkey country-specific exchange traded fund was among the worst performers Monday, with Turkey's lira currency touching new record lows, as a diplomatic row between Turkey and U.S. added to the volatility.

The iShares MSCI Turkey ETF (TUR) declined 6.5% Monday. Further weighing on the Turkish markets, the U.S. Dollar strengthened 3.9% against the Turkish lira to ₺5.2801.

Turkey's lira hit a record low and bonds plunged on heightened concerns over a diplomatic scuffle between the U.S., Bloomberg reports.

The U.S. placed sanctions on two senior government ministers over Turkey's detainment of an American pastor over espionage and terrorism charges.

President Recep Tayyip Erdogan said Saturday that Turkey will respond in kind to U.S. sanctions over the detained American pastor.

As the currency depreciated, Turkish policymakers changed reserve rules to bolster the banks’ foreign-exchange liquidity, which many analysts argue is insufficient to support the decline in the lira.

“This is chump change and the fact that this is all they can do while the lira is in free-fall is quite disappointing,” Win Thin, a strategist at Brown Brothers Harriman, told Bloomberg.

Related: Turkey ETF Plunges After Central Bank Stands Pat on Rates

Lira Currency Vs. U.S. Dollar

The country's lira currency has weakened about 28% against the U.S. dollar so far this year. The weakness in the lira has in turn diminished the ability of companies to repay foreign currency-denominated debt, fueled inflation and pressured the central bank to hike rates, which would further hamper growth.

Commerzbank analyst Lutz Karpowitz warned that Turkey’s central bank move to adjust the reserve options mechanism will only lead to more currency weakness and its reluctance in hiking rates is seen as a dovish signal, which will likely further weaken the lira.

On Friday, the government will release data over the current account balance. The deficit has been widening, and economists warned this could make the country increasingly vulnerable to external shocks, the Financial Times reports.

“We continue to focus on the financing of the deficit as a key area of risk,” Goldman Sachs economists said in a preview of the report.

For more information on the Turkish markets, visit our Turkey category.