© Reuters. FILE PHOTO: This illustration shows Turkish lira banknotes
By Ece Toksabay and Jonathan Spicer ISTANBUL (Reuters) – It was down in early trading on Monday, adding to a recent drop and approaching a record low as relations with the United States took hold and after the new The central bank director pointed out that rate hikes would hurt the economy. The currency, which is among the worst performing in emerging markets this year, touched 8,425 against the dollar, approaching its low in 2021 and close to its record of 8.58 reached in early November. “The market negativity is intense. (The) risk of an overshoot is sadly high,” said Robin Brooks, chief economist at the Institute of International Finance. The lira lost 3.5% in the last three trading days as it became clear that US President Joe Biden would officially recognize the 1915 Armenian massacres in the Ottoman Empire as genocide. Turkey, a NATO ally, harshly criticized the White House decision, which was announced on Saturday, and said it undermined trust and friendship. Turkish assets are particularly sensitive to tensions in relations with Washington given the past fallout from sanctions and economic threats from the United States, including a 2018 dispute with then-President Donald Trump that sparked a lira crisis and recession. . President Tayyip Erdogan’s spokesman and adviser, Ibrahim Kalin, told Reuters that Washington should act responsibly, as no one is interested in “artificially undermining ongoing relations because of narrow political agendas.” “Everything we do with the United States will be under the spell of this regrettable statement,” he said in an interview Sunday. Adding to investor nervousness, Central Bank Governor Sahap Kavcioglu, who was appointed a month ago, said late on Friday that while he would keep monetary policy tight for now, any rate hike would send a bad message to the real economy. “Who is happy with high interest rates?” he said in his first televised interview as a bank manager. RATE CUTS The lira has fallen for the last six consecutive business days. It plunged as much as 15% after Erdogan last month fired Naci Agbal, a respected policy hawk, as central bank governor and appointed Kavcioglu, who like Erdogan is a critic of tight monetary policy and has adopted the unorthodox view that it causes inflation. Agbal had raised the monetary policy rate to 19% to curb inflation, which rose above 16% and is expected to reach 18%. Many foreign investors who bought Turkish assets under Agbal fled when he was fired. Analysts expect the bank to start cutting rates in the middle of the year, with some predicting that Kavcioglu could revert to an expensive policy, carried out before Agbal was appointed in November, of selling foreign currency (FX) reserves to support the lira. The political opposition has pressured Erdogan and his ruling AK Party to account for some $ 128 billion in sales in 2019 and 2020, which were made by state banks and backed by central bank swaps, drastically depleting their foreign exchange reserves. In the interview, Kavcioglu defended the sales against what he called “attacks” that started with the 2018 crisis. Kavcioglu “seemed quite confident in the quality of the reserves, saying that they only switched from assets to liabilities,” said Ozlem Derici Sengul. , founding partner of Spinn Cinsulting. But “losing assets and maintaining liabilities means that the system remains quite fragile in the face of a situation such as a bank run in which households and companies need their deposits in foreign currency,” he said. Erdogan has fired three heads of central banks in two years, eroding monetary credibility.