US President Donald Trump dramatically increased the pressure on Turkey on Friday, threatening to double tariffs on the country's aluminium and steel exports, leading to a fresh slump in the already tumbling lira.
Bank shares across Europe fell and the euro slipped to its lowest since July 2017 as the Financial Times quoted sources as saying the European Central Bank was concerned about European lenders' exposure to Turkey.
"With EMEA a source of geopolitical risk, we think it will be hard for the ZAR to also stabilise - in effect the Rand's source of market risk has shifted from a weaker CNY to a weaker TRY and RUB", says foreign exchange strategist Viraj Patel with ING Bank N.V. The currency has fallen more than 40 per cent this year, fanning worries about a full-blown economic crisis.
Economist Chad Bown, who specializes in trade issues, said Turkey accounted for just over four percent of U.S. steel imports in 2017, but a very small fraction of the aluminum brought into the country.
Earlier on Friday, Trump ramped up his attack on Turkey by doubling USA tariffs on Turkish aluminium and steel imports to 20 percent and 50 percent, respectively.
Image: Donald Trump claimed 'relations with Turkey are not good at this time!'
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Turkey is a major emerging market economy with $466 billion in foreign debt (about 78 percent in US dollars and about 18 percent in euros), or 52.9 percent of gross domestic product.
Turkey's currency crisis spilled loudly on to the global stage Friday as other markets, including United States stocks, took at hit from concern about financial contagion to other countries and banks. The president launched his steel and aluminum tariffs on the grounds that maintaining a robust domestic metal industry was a core national-security interest of the United States, and that competition with metal imports was threatening to drive said industry into extinction.
"Turkey expects other member countries to abide by worldwide rules", the country's trade ministry said in a statement.
The US has refused to extradite Fethullah Gulen, who lives in Pennsylvania.
Last week, the Trump administration said it would review Turkey's duty-free access to US markets, a decision that could impact some $1.7 billion of imports.
While Turkey and the United States are at odds over a host of issues, the most pressing disagreement has been about the fate of American Christian pastor Andrew Brunson, who is on trial on terrorism charges for allegedly supporting a group that Ankara blames for the failed coup.
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U.S. investment bank Goldman Sachs alarmed investors with an assessment that a further drop in the lira to 7.1 to the dollar "could largely erode" the excess capital of Turkish banks.
"If you have dollars, euros or gold under your pillow, go to banks to exchange them for the Turkish lira". But Israel released that woman last month, and pastor Andrew Brunson of North Carolina remains in a Turkish prison. This is a national struggle. On Friday, he said the country had to take steps in answer "to those who have waged an economic war against us".
US officials have said the courts would require sufficient evidence to extradite the elderly Gulen, who has denied any involvement in the coup.
Should the woes of the lira risk feeding into a widescale economic crisis, the government still has levers at its disposal. It is obvious how it will be done: "since the final decision-maker of all policies in the new regime is the president, the responsibility of regaining confidence is on his shoulders", said Seyfettin Gursel, a professor at Turkey's Bahcesehir University. That makes a loan in dollars that much more expensive to repay.
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