The Turkish lira extended its decline, hitting all-time lows as higher U.S. dollar funding costs prompted investors to sell emerging-market currencies.
The dollar was up 2% against the lira to 4.5820 by 10 a.m. ET on May 21. The dollar is up against the lira almost 12% since April when the 10-year U.S. Treasury yield went over 3%.
"Higher U.S. interest rates are tightening financial conditions in emerging markets, weakening currencies like the Turkish lira and Argentine peso to record lows against the dollar," PNC Financial Services Group economists said in a research note.
Turkey is especially vulnerable as its reliance on dollar-denominated debt is, by far, the most of any emerging market, Kit Juckes, Société Générale's chief global FX strategist, said in a research note.
Total credit to nonfinancial Turkish corporations had shot up to 67.4% of GDP by the third quarter of 2017, up from 44.8% of GDP in 2012, according to the Bank for International Settlements.
Turkish President Recep Tayyip Erdogan did not help the lira's case as he met with potential investors in Europe last week.
Erdogan told Bloomberg TV that he intended to be more involved with central bank policy following June's presidential elections, which he is expected to win.
The Turkish president claims that keeping interest rates low would lower the inflation rate, currently running at about 10%, which is the opposite of what economists would predict.
In April, Turkey's central bank increased its late liquidity window lending rate, which is its highest rate, to 13.5% from 12.75%, the first rate increase this year.
"Combining this unorthodox philosophy with Erdogan's explicit declaration that he intends to influence monetary policy left the lira even more vulnerable against a broadly stronger U.S. dollar," Piotr Matys, Rabobank's emerging markets FX strategist, said in a note.
Even before the Turkish president's comments, there were concerns about the country's central bank's independence, Matys said in an interview.
Before Erdogan's comments, Matys said he would have believed that if the Turkish central bank raised rates 150 to 200 basis points, it would have been enough to give the lira some relief.
"But now I'm skeptical that even raising interest rates by 200 basis points will be enough," he said.
