The Turkish lira jumped the most in a year on Friday, according to prices quoted on the spot market at Istanbul’s Grand Bazaar, after the central bank tweaked rules for gold trading in its latest effort to support the currency.
(Bloomberg) — The Turkish lira jumped the most in a year on Friday, according to prices quoted on the spot market at Istanbul’s Grand Bazaar, after the central bank tweaked rules for gold trading in its latest effort to support the currency.
The lira advanced as much as 1.7% to 19.9450 per dollar at the bazaar before paring gains, narrowing the gap with the official interbank rate, which was little changed on the day at 19.4512. The ancient market has become an important trading center — and reference point — for the Turkish currency as authorities have gradually tightened their grip over the official rate.
The appreciation at the bazaar on Friday brought the spread over the lira’s official exchange rate to below 3% after it surged to more than 5% last week.
READ MORE: Turks Skip Banks and Flock to Ancient Bazaar to Dump Their Liras
The advance came after the central bank said liras could be used to purchase gold, a move designed to ease pressure on the currency at the bazaar, Bloomberg reported on Thursday. Before that, gold merchants there could only buy the precious metal with dollars.
“The central bank now allows buying gold with liras, which is supporting the currency,” said Mehmet Ali Yildirimturk, a gold and currency analyst and trader at the bazaar. “But I don’t think this trend is sustainable and I expect a stronger dollar next week.”
Yildirimturk said companies selling dollars to make month-end tax payments in liras were also contributing to the local currency’s gains on Friday.
Reserves Depletion
Demand for gold in Turkey has surged as citizens sought protection from inflation and potential currency losses ahead of pivotal presidential elections next month. Turkey suspended imports of the precious metal in February after they became a drag on external finances, contributing to a widening of the current-account deficit.
Since then, the central bank has started selling off its gold reserves to meet local demand, Bloomberg reported on Thursday. The bank’s gold reserves have tumbled by about 9% in the past seven weeks, according to official data.
Accepting liras for its gold will deplete the central bank’s total FX reserves, but doesn’t reduce its capacity to intervene in the currency market using dollars, said Nick Stadtmiller, head of product at Medley Global Advisors in New York.
“It seems the central bank is desperate to prevent a further devaluation ahead of the election,” he said. “But afterwards they will either have to tighten up capital controls significantly or let the lira slide.”
(Updates with Stadtmiller comments at end.)
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