(Bloomberg) -- Turkey’s lira depreciated on Monday as state lenders abstained from aggressively defending the exchange rate and traders responded by unwinding some carry trades, according to people familiar with the matter.
The lira weakened as much as 0.6% per dollar and was trading 0.3% lower as of 1:20 p.m. in Istanbul. That compares with a daily average loss of less than 0.1% over the past three months, according to data calculated by Bloomberg.
The losses came after state banks sold dollars at weaker lira levels on Monday, according to traders familiar with the transactions, who asked not to be identified because they weren’t authorized to speak publicly. That led funds, including some hedge funds, to cut back on their lira carry positions, intensifying the move, according to the people familiar. Total outflows from overseas investors exceeded $2 billion, they said.
The lira was among the few emerging-market currencies that appreciated in the wake of Donald Trump’s victory in the US presidential election on Nov. 5. At the time, other emerging-market currencies were suffering steep losses and hedge funds turned to the lira as something of a haven, encouraged by support for the currency from state-run banks and backed by appealing carry-trade returns.
The carry trade refers to a practice of borrowing in places where interest rates are low, and investing that borrowed money in locales where returns are higher.
Turkey has the second-highest benchmark interest rate in the world, at 50%, and returns have been made more attractive by authorities’ efforts to keep the lira-dollar exchange rate relatively stable. The lira has declined by about 14.5% against the dollar this year, meaning it’s appreciated in real terms when compared to an inflation rate last clocked at close to 49% in October.
(Updates with estimated outflow figures in third paragraph.)
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