USD/TRY falls 25% from previous highs to 13.50.

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The Turkish currency recovered spectacularly on Monday as Turkish President Recep Erdogan proposed unconventional new plans to reduce the impact of exchange rate volatility on Turkish savers. 

The President unveiled a slew of new economic initiatives, but the one that drew the most attention was a system via which the government will refund losses to domestic TRY accounts as a result of the TRY/USD exchange rate drop. 

According to certain experts and traders, these anti-dollarisation efforts amount to a “hidden” interest rate rise paid by the public purse.

The USD/TRY spot market is now at 13.50, an almost 20% drop from last Friday’s closing levels of 16.40. The drop is even more astounding given that USD/TRY was trading in the 18.30s at one time. That implies the lira has increased in value by 25% since its intraday lows. 

According to market response, President Erdogan looks to have pulled a rabbit out of a hat with his latest policy of basically giving more interest to Turkish depositors through the public purse. However, when it comes to monetary policy, Turkey is currently in uncharted terrain. 

In pledging to guarantee depositors against exchange rate losses, the government has taken on a potentially massive obligation, and experts will be asking how this will affect the government’s budgetary situation in the future.

Some argue that the Turkish government has now exposed itself to a vicious cycle in which, if the value of the currency falls too much, it will have to borrow even more of it to cover investor losses.

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