Turkish lira recovery at risk after Donald Trump threatens sanctions

President said in a tweet that the US would be 'cutting back on Turkey'

The Turkish lira has recovered some of its recent losses against the dollar this week, but analysts warned the currency is in for a bumpy ride as the US threatened to impose sanctions on Turkey.

The lira steadied to 5.8 per dollar on Friday morning, a significant improvement from its record low of 7.23 per dollar, aided by a $15bn (£12bn) investment by Qatar. However in afternoon trading, $1 was buying more than 6 lira.

Analysts warned sanction threats could mean more volatility ahead for the lira.

The US and Turkey are locked in a diplomatic dispute over the detention of American pastor Andrew Brunson, who is accused of playing a role in a failed coup in Ankara two years ago.

On Thursday, US Treasury secretary Steven Mnuchin told President Trump sanctions were ready to be put in place if Mr Brunson was not freed.

Mr Trump later said in a tweet the US would “pay nothing for the release of an innocent man” adding the nation is “cutting back on Turkey”.

Lukman Otunuga, a research analyst at foreign exchange broker FXTM, warned: “While the lira has scope to claw back more losses, gains may be capped by the ongoing uncertainty.”

Meanwhile, Per Hammarlund, chief emerging markets strategist at SEB, said the rebound in the lira is expected to be temporary, because “the basic reasons for... weakness are still in place”.

“The sell-off will resume in the absence of a major shift in economic policy making in Turkey,” he said.

“Turkish finance minister Berat Albayrak continues to reassure investors that Turkey will address its structural problems, but at this stage crisis measures – including sharply higher policy rates, a tightening of fiscal policy and support to troubled sectors such as construction, retail and banking – will be key. In sum, the economy is set to slow down sharply.”

Mr Hammarlund added: “Unless the government introduces an austerity programme within the [coming] weeks, an event such as sharply higher inflation (likely) or a large fine on Halkbank for violating US sanctions on Iran (possible), could trigger a full-blown balance of payments crisis, followed by a banking crisis.

“So far, the government has shown few signs of being willing to change course, either on economic policy or in its relations with the US. The lira is in for a bumpy ride.”