Dollar is rising, not FX rates…

People got upset when they heard that there’s been a rise in US dollar on Tuesday night, thinking that FX rates are going up. However, only dollar is rising, not FX rates. Here’s how…

According to some people, the reason underlying the recent rise in FX rates was charges against Halkbank in Manhattan Federal Court, but in fact, the sharp decline in exchange rate EURO to US DOLLAR was the driving force behind it. It makes me really sad to some people constantly come up with conspiracy theories about dollar’s rise despite the fact that the currency basket remains absolutely stable.

This is not the first time we’ve seen market experts going figuratively blind because of their political views or previous resentments whereas they should have looked into multiple details before making comments about the economy. So, on Tuesday night, I had to share the following message on social media in order prevent the upcoming debate storm from harming investors any further:

“Dear Friends… If #dollar rises against Turkish Lira but #currencybasket remains stable, then the reason behind the recent rise must be the rise in exchange rate EURO to US DOLLAR. No need to panic at all…”

This twit received mostly positive comments, except for a few objections. “Because exchange rate British Pound to US Dollar is going up as well”; this was my answer to one of my followers who has disagreed with me, twitting, “But, exchange rate British Pound to Turkish Lira goes up too”. In other words, TRY depreciated against both currencies since US dollar has risen against Euro and British Pound has risen against Dollar in global markets.

“There won’t be a sharp rise in exchange rate US Dollar to Turkish Lira unless we face something unexpected…”

When US-Turkey relations were about to come to an end last week, in exchange rate US Dollar to Turkish Lira hit a maximum of 5.93 and then fell sharply. This goes to show that those who had bought large amounts of currency for high prices continue to put sale pressure on USD/TRY. The only thing I can say to you is that you should not expect major movements in FX rates unless Turkish economy faces a big panic.

Although people investing in various asset classes denominated in foreign currencies seem to be upset by the situation, thankfully general level of prices remain stable as FX rates’ transitivity over inflation still continues. Turkey is used to live with foreign currency-denominated costs almost since 1950s. That is why rises in FX rates do not bring severe disruptions to economy. However, the constant decline in FX rates isn’t good for Turkey either as it leads Turkish economy into a deadly spiral of devaluation-inflation while increasing borrowing rates and appetite for consumption.

Accordingly, neither a sharp fall nor a sharp rise in FX rates is good for Turkish economy. The only way to achieve and maintain FX rate stability is to reduce foreign dependence. And in order to achieve this end, government must avoid preventing its citizens from buying imported goods; instead it should create the necessary environment for domestic producers where they can produce goods that are of acceptable quality.