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Turkish lira hits new low after Erdoğan’s election victory

Turkey’s lira hit a new low against the dollar after President Recep Tayyip Erdoğan secured a victory in the country’s election over the weekend.

The lira weakened to 20.08 on Monday, the latest in a string of record lows, according to Refinitiv data, as investors soured on Erdoğan extending his rule into a third decade after beating his rival on Sunday in a bitterly contested election run-off. The lira has slumped more than 7 per cent so far this year.

Morgan Stanley analysts said Turkey’s currency risked falling further “without a change in the macro policy framework to prioritise disinflation and to adopt market-friendly policies”.

Turkey’s economy is facing growing strain, with investors particularly worried about the country’s dwindling foreign currency reserves and soaring inflation.

“Erdoğan’s biggest challenge is Turkey’s economy. His victory comes against a backdrop of perilous economic imbalances,” said Roger Mark, analyst at asset manager Ninety One, adding that the president’s economic plans were “proving increasingly unsustainable”.

Elsewhere, Asian equities were broadly higher and US stock futures rose on Monday after US president Joe Biden struck a deal with Republican House Speaker Kevin McCarthy that would raise the US debt ceiling and prevent an unprecedented default in early June.

Japan’s benchmark Topix stock index rose 0.7 per cent and Australia’s S&P/ASX 200 was up about 1 per cent. Hong Kong’s Hang Seng was down 1 per cent and China’s CSI 300 shed 0.4 per cent.

Markets in the US and UK were closed for a holiday on Monday, but stock futures in Asia tipped the S&P 500 to rise 0.2 per cent and the tech-focused Nasdaq to gain 0.4 per cent. The S&P 500 rose more than 1 per cent on Friday to its highest level in nine months on growing hopes for a debt ceiling deal.

US Treasuries were unmoved in Asia on Monday, but the yield on the 10-year government bond had closed 0.02 percentage points lower at 3.798 per cent on Friday. Bond yields move inversely to prices.

The deal reached on Saturday followed days of tense negotiations between the White House and Capitol Hill to avert a looming default before the US is expected to run out of cash to pay off its obligations on June 5.

Both sides have moved to quell discontent over the compromise in their respective parties ahead of an expected vote on Wednesday in the House of Representatives, controlled by Republicans, which would be followed by a vote in the Democrat-controlled Senate.

Fitch, the rating agency, put the US’s triple A credit rating on negative watch last week as a result of the impasse over the debt ceiling.

“This still has to go through both the House and Senate, and the deal may not be palatable to the [Republican] Freedom Caucus or the more left-leaning parts of the Democratic party,” said Kerry Craig, a global market strategist at JPMorgan Asset Management.

Craig said that while the ostensible deadline to raise the debt ceiling had been pushed back enough to provide time for a deal, “there’s still lots that could come up that could see this [deal] pushed back or renegotiated in parts”.

“A House vote on the deal is likely midweek, the fate of the bill remains uncertain given some Republicans were angling for bigger cuts and some Democrats wanted no cuts,” said Tom Kenny, senior economist at ANZ.

Kenny said recent readings on the US economy had been strong enough that the US Federal Reserve might decide to continue raising interest rates “should fiscal and financial uncertainties blow over shortly and without causing economic pain”.

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