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Forex pairs in this Article » EUR/USD (London) - The Turkish lira has continued to be buffeted this week. USD/TRY has fallen 0.66 percent to TRY 2.1405. The drop continues the lira’s record lows.

The lira has fallen 5.9 percent since December 17 when the police arrested the sons of three former cabinet ministers as well as the chief executive of a state-run bank as part of corruption investigations. 24 people still remain under police detention, including the sons of former ministers of interior affairs (Muammer Güler), economy (Zafer Çağlayan) and environment (Erdoğan Bayraktar).

While the corruption investigations triggered the sharp declines in the lira, as well as equity market falls which have knocked 17 percent off the Istanbul 100 index since 16 December, the country is being buffeted by a combination of factors. USD/TYY has been under pressure thanks to the US Federal Reserve’s decision earlier this month to taper its monthly asset purchases by USD10bn to USD75bn pushing yields higher and putting pressure on emerging market fx across the board.

Internally, the pressures following the scandal have brought to the fore the economic frailty of Turkey, particularly its macroeconomic imbalances. November CPI was reined in to 7.3 percent year-on-year, down from the October figure of 7.73 percent and the July high of 8.9 percent year-on-year. However, inflation remains well wide of Turkey’s 5 percent target.

But more significant is Turkey’s current account balance, running at a seasonally-adjusted 7.7 percent of GDP in the third quarter of 2013 – a situation that will not be aided by a weakening lira.

All of which points to further weakness for the lira and further difficulties for the Turkish economy.
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