Whatever happened to the Turkish Lira?

Turks are now acting as if it came as a surprise. The Turkish Lira has lost around 9 percent of its value against the dollar in a single month. If you take January of this year as the starting point, the lira has lost around 27 percent of its value. Why?

There are two types of countries in the world: Those where the government determines the value of the currency and those where the markets do it. Turkey is in the second category. We are no Venezuela when it comes to the currency regime, nor are we China. The lira has been fully convertible since the late 1980s and it has been freely floating since the 2001 crisis. This means that it acts as a barometer for market forces, and the government keeps a close watch on its movements.  

What happens whenever the authorities do not take the ?necessary? measures? The exchange rate adjusts. What happens if the Central Bank is seen as a lame duck and not in a position to raise interest rates when necessary? The exchange rate adjusts. What happens when the investment environment in the country is not conducive? The exchange rate adjusts. What happens when the direction of fund flows changes due to external reasons? The exchange rate adjusts. What happens when the security situation in the country deteriorates? The exchange rate adjusts. What happens when policy uncertainty in the country grows? The exchange rate adjusts. What happens when political uncertainty bubbles up? The exchange rate adjusts. You get the point.

All of that is happening now, and the results are all too clear. Turkey is moving into the eye of the storm, into a position of extreme uncertainty. In an environment where our policy uncertainties are exacerbated by political uncertainties, neither the imminent U.S. Federal Reserve...

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