By Mike Bird and Carolyn Cui
The Turkish lira fell as much as 3.5% against the U.S. dollar Wednesday on escalating concerns over Turkey's economy and security.
The decline marked the biggest daily drop since a failed coup in July 2016, when factions of the Turkish military attempted to overthrow the government of President Recep Tayyip Erdogan.
Wednesday's slide came as data showed Turkey's current-account deficit widened in November. But investor concerns have been building in recent weeks over Turkey's economy, Mr. Erdogan's response to July's insurrection, and political uncertainty over a bill to overhaul the constitution that would concentrate executive powers in the president's office.
The lira has fallen for the past five days, with investors ignoring an attempt by the Turkish central bank to shore up the currency on Tuesday. It has fallen 10% against the greenback since the beginning of the year and was trading down 2% at 3.88 to the dollar in late European trading.
"Such price action implies that we are witnessing a full-scale crisis of confidence in the lira caused by rapidly escalating market concerns about domestic factors dominated by prevailing security issues, uncertainty in politics after the failed coup and the risk of a downgrade by rating agencies," Piotr Matys, emerging-market currency strategist at Rabobank, wrote in a note.
The lira's fall comes as many emerging-market currencies decline against the dollar amid expectations of higher U.S. interest rates.
But among emerging markets, some analysts believe that Turkey is the most vulnerable to the stronger dollar and recent rises in global bond yields, due to its heavy reliance on short-term dollar funding.
Turkey's short-term external debt amounted to 74% of its total foreign reserves in October. Around half of that debt was denominated in dollars, according to Turkey's central bank.
Some of the factors that had contained the lira's downward move in 2016 are no longer in force, said Jonas David, an emerging-market analyst at UBS Wealth Management.
As bond yields continue to climb from their last year's record lows, financing foreign debt becomes more expensive.
Turkish households had also been buying local assets such as stocks and bonds, which had supported the lira in mid-2016, Mr. David said. But they have been increasingly converting their deposits into dollar, thanks to declining confidence in the economy and intensified geopolitical risks, he said.
Derivative contracts that allow investorsto buy and sell the lira at a future date suggest that investors generally believe the currency will stay weak throughout the year. Futures contracts expiring in December now trade at 4.14 to the dollar, 0.34 lira above the currency's current level.
Investors have also continued to sell Turkish bonds, adding to pressure on the lira.
Turkish government bond returns fell 1% in 2016, while global emerging-market sovereign debt returned 9.6%, according to Citi analysts.
"People were already quite underweight in December, they're certainly more underweight now, both real money and hedge funds," said Paul McNamara, a portfolio manager at GAM Holding AG.
He expects the central bank to raise the benchmark interest rate from 8% to stem the currency's weakness. "I don't see what's going to stop it falling otherwise."
On Tuesday, Turkey's central bank loosened foreign-currency reserve requirements by a half percentage point. The move was aimed at allowing banks to release foreign currency into the market and prop up the lira, but the currency fell around 2.3% that day.
The central bank promised further steps to maintain prices and financial stability, without providing further details.
Turkish authorities have also attempted more unconventional measures to halt the selloff. In December, Mr. Erdogan called on the public to exchange their foreign-currency savings to support the currency.
Dollar strength is adding to the pressure on the lira, and other emerging-market currencies. The ICE dollar index, which measures the greenback against a basket of international currencies, is up 0.7% in 2017 so far amid expectations that U.S. interest rates will rise at a faster clip than expected through much of last year.
--Riva Gold, Georgi Kantchev and Yeliz Candemir contributed to this article.
Write to Mike Bird at Mike.Bird@wsj.com and Carolyn Cui firstname.lastname@example.org
(END) Dow Jones Newswires
January 11, 2017 14:25 ET (19:25 GMT)
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