The Turkish lira weakened against the US dollar, falling with 1.6% to a new low exchange rate of USD/TRY at 3.60. The situation in the country is extremely delicate because the attacker, who killed 39 people at a nightclub in Istanbul on New Year Eve. The risk remains large, as the local authorities still did not arrested the attacker after several failed attempts. The increasing terrorism in the country seriously affected the tourism, which is important sector of the economy.
Over the past 12 months the Turkish lira fell by 19%. The current data showed that inflation in December was 8.53%, which was above expectations and 3.5 percentage points above the target level of the central bank.
The deterioration of the economic situation, including the contraction in GDP in the third quarter and the decline in consumer trust in December, accompany for rising security risks. The terrorist group ISIS has claimed responsibility for the attack in the club Reina. But this is only one of the over 170 terrorist attacks during the year.
The market participants are looking for signs that the central bank takes seriously the threat of higher inflation. The economists predicted that the currency will depreciate further and the exchange rate USD/TRY will surpass 4.00 in the first six months of 2017.
Until we see an aggressive tightening of monetary policy, similar to that of early 2015, the Turkish lira will continue to be subject of sales on bad news as the terrible terrorist attack and not expensive when attitudes are better.