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Turkish Lira Currency Prediction - Lira Weighed Down by Interest Rate Predictions

February 10, 2011 - Written by John Cameron

The Turkish Central Bank’s Monetary Policy Committee is due to meet next Tuesday to decide on policy for the coming month. The New Turkish Lira weakened during today’s trading session on speculation that the meeting will herald a further interest rate cut. The Turkish MPC has chosen to cut base rate by 75 basis points in the last two meetings, leaving current rates at a record low of 6.25%.

Meanwhile, Turkey’s ISE National 100 Share Index has performed well, rallying to a two week high earlier in the week, as domestic investors shift out of fixed-income assets and seek a healthier return on their holdings.

Earlier this week, Turkish Central Bank Governor Durmus Yilmaz commented that Turkey may keep rates low ‘for a long time’ in order to stem inward flows of short-term capital into Turkish financial markets. The Governor feels that these inflows are causing the Turkish current account deficit to widen and that a loosening of monetary policy will keep this increasing trade gap under control.

The Turkish Lira continues to act as a hedge currency for traders adjusting their positions according to developments in the political situation in Egypt. Egyptian authorities have acted to control inward and outward flows of the Egyptian Pound, so investors are using the Lira as a proxy as developments occur due to Turkey’s geographical proximity to Egypt. In reality, Turkey has stronger links with Europe than with the Arab world. However, the foreign currency markets do not always work in a logical way and the Lira may remain under pressure until control of power in Egypt is wrested from President Mubarak.

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