Turkish lira slumps sharply amid signs of renewed tensions with U.S.

ANKARA, March 22 (Xinhua) -- The Turkish lira fell sharply on Friday amid signs of a new rift between Turkey and the United States over the Golan Heights, just a week ahead of critical municipal polls in the country.

The Turkish currency traded at 5.75 liras against the U.S. dollar in the evening, a depreciation of 5.5 percent compared to Thursday, the most since a currency meltdown last August in the back of a previous diplomatic row with Washington.

This is the lowest trading value of the Turkish currency since last October, according to analysts who said that Turkey's main stock index also slipped, and its dollar bonds fell across the curve.

Last year, the lira hit a record low of 7.24 against the dollar in August, as NATO allies Turkey-U.S. ties were strained by the case of a U.S. pastor detained for terrorism, who has since been released.

The embattled Turkish currency lost about 30 percent in 2018 against the dollar, before the central bank raised its benchmark rate by a massive 625 basis points in last September.

In a speech on Friday in Istanbul, Turkish President Recep Tayyip Erdogan said that U.S. President Donald Trump's statement on Golan Heights risked a crisis, adding that "Turkey cannot allow the legitimization of the occupation" by Israel, state-run Anadolu Agency reported.

The risk of a flare-up in tensions with the U.S. over Turkey's insistence of purchasing Russian S-400 missile defense system, despite Washington's strong objection, seems to contribute to the decline of the lira as well.

Erdogan repeatedly said that his country won't back from the Russian deal and the missile system will be deployed at the end of this year in Turkey, a move that comes in the wake of improved ties with Washington after nearly two years of severe tensions.

The Turkish Central Bank reacted to the depreciation of the lira on Friday by suspending weekly repo auctions for an undetermined period of time, according to a statement. The move aiming to squeeze liquidity only briefly firmed the currency before it eased back.

The actual rout is also being compounded by signs that local investors are turning to foreign currencies amid runaway inflation that is eating away at their lira savings.

Concerned of renewed tensions with the U.S., Turkish households and companies bought 4 billion U.S. dollars of hard currency in the week which ended on March 15, the most since 2012, according to official data.

After the publication of this data, Turkish authorities issued on Thursday a new decision increasing the rate of interest tax on foreign currency deposits from 13 to 18 percent.

Turkey is heading to key local elections on March 31 seen as a test for the 65-year-old Erdogan's popularity amid recession, high inflation and rising unemployment, after years of sustained growth in the emerging nation.

The Turkish leader never lost an election since his conservative Justice and Development came first to power in 2002. He considerably strengthened his executive powers following a previous election in 2018.