(Bloomberg) -- Turkey’s lira was the only emerging-market currency to gain against the dollar on Wednesday, as peers around the world tumbled on the prospect of a return to the White House for Donald Trump.
The currency rose as much as 0.3% against the dollar as of 9:55 a.m. in London, benefiting from strong support from state-run banks that also encouraged foreign funds to enter the market, according to traders familiar with the transactions, who asked not to be identified because they weren’t authorized to speak publicly.
The state lenders sold more than $500 million to defend the lira at a level around 34.3550 per dollar mostly during Asian trading hours, when other emerging-market currencies were tanking on the prospect of a Trump victory, the traders said. On the back of that support, hedge funds joined in, the people said.
“It makes sense for foreigners to enter into lira positions because carry trade is still appealing and the volatility in other EM currencies is too high” said Onur Ilgen, head of treasury at MUFG Bank Turkey in Istanbul. Even before the elections, investors were betting that the lira could benefit from Turkish President Recep Tayyip Erdogan’s personal relations with Trump, Ilgen said.
The “carry trade” refers to the practice of borrowing money where interest rates are low and investing it in countries and currencies that offer higher returns, like Turkey, where the central bank’s benchmark interest rate is 50%. That’s the second highest in the world, a return made even more attractive by authorities’ efforts to keep the lira relatively stable against the dollar.
Turkish bonds and stocks joined in the rally, also outliers among emerging-market peers on the day. The yield on 10-year lira bonds dropped 13 basis points to 31%, while the benchmark stock index jumped as much as 3.2%.
The lira’s gains on Wednesday came as the dollar hit its strongest level in a year, with the Bloomberg dollar index jumping as much as 1.7%, the biggest upward move in four years.
The lira’s “incredibly high carry is more than enough to offset any dollar move, and as a result, we don’t see lira spot rates moving in any significant manner,” said Peter Kinsella, global head of FX strategy at Union Bancaire Privee Ubp SA in London.
(Updates with bonds and stocks in sixth paragraph. A previous version corrected the date of market moves in the first deck headline.)
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