A plummeting Turkish lira sent ripples through global equities and emerging markets on Friday, as rising fears of a wider fallout sent investors scurrying for the safety of assets such as the yen and U.S. government bonds.
The lira fell as much as 12 per cent against the dollar earlier in the day, its worst day since Turkey’s financial crisis of 2001, on the back of a deepening rift with the United States, worries about its own economy and lack of action from policymakers. The currency is down more than 35 per cent this year, its losses accelerating as the dollar jumped to 13-month highs
That is spreading fear of an impact on other economies and markets -- bank shares across the continent fell and the euro slipped to its lowest since July 2017 as the Financial Times quoted sources as saying the European Central Bank was concerned about European banks’ exposure to Turkey.
Shares in France’s BNP Paribas, Italy’s UniCredit and Spain’s BBVA, the banks seen as most exposed to Turkey, fell as much as 4 per cent.
That took European bank shares down 1.3 per cent while the pan-European STOXX 600 index fell 0.7 per cent.
The MSCI All-Country World index, which tracks shares in 47 countries, was down 0.6 per cent on the day, having erased all its gains for the week. Wall Street was set for a weak open.
“People looking at things this morning are much more aware that there is central (major) contagion risk,” said David Owen, chief European economist at Jeffries in London.
“Having said that, what’s happening in emerging markets is leading to risk-free rates being bid for and that includes Treasuries, Bunds and gilts.”
As investors piled into “safe” bonds, German yields hit three-week lows and yields on U.S. 10-year Treasuries fell to 2.8913 per cent.
Investors are now awaiting the release of the U.S. consumer price inflation for July for clues on the interest rate outlook and to gauge if new import tariffs were starting to have an impact. The data is expected to show inflation likely increased 0.2 per cent, after rising 0.1 per cent in June.
The Australian dollar - often viewed as a proxy for global risk appetite because of its commodity reliance - was the biggest faller among developed currencies, down 1 per cent on the day. Going in the opposite direction was the safe haven Japanese yen, which hit a one-month high against the dollar.
The dollar index, which measures the greenback’s strength against a group of six major currencies, breached the 96 level, taking it to its highest level since July 2017.
Adding to emerging market currency woes was the Russian rouble, weakened to 67.12 to the dollar. Overnight it had retreated to its lowest since November 2016 on threats of new U.S. sanctions, weakening beyond the psychologically important 65-per-dollar threshold.
“Other EM currencies have held their ground against the dollar, having generally been weakening previously,” said analysts at Capital Economics.
“In most cases though, we suspect that this resilience will prove temporary,” they said, highlighting expectations of rising U.S. interest rates and worries over growing U.S. protectionism.
In commodities, U.S. crude oil fell 0.5 per cent to $66.51 a barrel, while Brent crude was 0.4 per cent lower at $71.77 per barrel.
Despite the broader flight to safe havens, gold was lower. Spot gold fell 0.3 per cent to trade at $1,207.15 per ounce.