ANKARA (Reuters) -
Turkey’s lira was on track for its strongest week on record on Friday, having spiked 44% with the support of billions of dollars of state-backed market interventions and a promise that the government would cover FX losses on certain deposits.
The currency had plunged on Monday to an all-time low of 18.4 to the dollar, after a months-long slide due to unorthodox interest rate cuts and fears of an inflationary spiral.
But late on Monday President Tayyip Erdogan unveiled a scheme in which the Treasury and central bank would reimburse losses on converted lira deposits against foreign currencies, sparking the biggest intraday rally ever.
The anti-dollarization plan set off four straight days of gains as Turks converted some $900 million worth of hard currencies into lira, according to Finance Minister Nureddin Nebati.
The currency cooled 4% on Friday to 11.85 versus the dollar at 0918 GMT.
The lira got a big boost from what traders and economists called backdoor dollar sales by state banks supported by the central bank.
In the first three days of the week alone, the central bank’s net foreign reserves dropped by $8.5 billion, according to the calculations of three bankers who spoke to Reuters. The drop totalled nearly $18 billion in December, they said.
As of Dec 17, the central bank’s net foreign reserves tumbled to $12.2 billion, from $21.2 billion a week earlier, to levels last hit in May in a reflection of the interventions.
The Turkish lira continues a rebound that it started on Monday hitting its highest level against the U.S. dollar in a month. It rose around 10 to 10.25 percent against the dollar on Thursday, with weekly gains of more than 40 percent.
The rally is mainly a result of a recent government plan to protect deposits, and state banks’ support by selling dollars. Despite the rebound, questions remain over Turkey’s anti-dollarization plan. The plan could further increase inflation, expand public debt and eat into foreign reserves if the lira begins sliding again.