Currency crisis rattles markets
The markets fear that this will spread to other regions, especially emerging markets (EEM). The European Union’s (HEDJ) (VGK) exposure to Turkey is also in focus. Media reports suggest that southern European banks have lent huge amounts of money, which could now be at risk, to Turkey.
This uncertainty has driven the world markets lower today. At 10:45 AM EDT, the S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite Index (QQQ) were trading at falls of -0.60%, -0.87%, and -0.54%, respectively.
Turkey’s crisis explained
Turkey’s economy has been facing difficulties since the start of the year due to growing inflation, a large fiscal stimulus, and a large current account deficit. The country’s current president is seen to be interfering with the workings of its central bank, further perpetuating the decline in its currency.
The most recent slide in the currency started when a Turkish delegation visiting the United States returned with no concrete progress on the detention of US pastor Andrew Brunson. Brunson was charged with supporting an attempted coup in 2016. On August 1, 2018, the United States announced sanctions on Turkey’s justice and interior ministers.
Geopolitical uncertainty and assets
US President Donald Trump tweeted today that he is authorizing a doubling of tariffs on steel and aluminum with respect to Turkey. The move has come in response to the Turkish president’s appeal to citizens to convert US dollars to other foreign currencies and to convert gold to lira. This development has intensified the lira’s decline.
Amid this geopolitical and currency crisis, gold (GLD) is gaining on investors’ flight-to-safety response. Gains in gold are, however, capped by the strength of the US dollar. Dollar-denominated assets such as gold usually have an inverse relationship with the US dollar. If this situation escalates further, however, the dollar and gold could rise simultaneously, as they did at the time of the Brexit vote.