The Turkish lira is at record lws against the dollar

Hong Kong (AFP) - Turkey’s lira plunged to record lows Friday as it was buffeted by a diplomatic row with Washington, while European markets were also feeling the strain from fears the crisis could spill over into the region’s banking sector.

The troubled currency collapsed 12 percent at one point on concerns about tensions with the United States linked to Ankara’s detention of an American pastor as well as economic uncertainty.

The losses Friday extended the previous day’s sell-off as high-level talks seeking to slacken tensions with the US produced no apparent breakthrough.

The stand-off has led both sides to slap sanctions on senior officials with concerns of graver measures to come.

At the same time, the Turkish economy under President Recep Tayyip Erdogan is showing signs of overheating, with the country running a large current account deficit that makes it heavily dependent on foreign capital inflows.

“The backdrop to endemic lira weakness is of course the familiar one of an economy suffering rising inflation and a burgeoning balance of payments crisis alongside a central bank that has in effect been stripped of much of its independence since Erdogan was re-elected… in June,” Ray Attrill, head of forex strategy at National Australia Bank, said in a note.

Concerns were intensified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank (ECB) had over the last week begun to look more closely at euro zone lenders’ exposure to Turkey.

The report said the situation is not yet seen as “critical” but Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas are regarded as particularly exposed.

London’s FTSE was down 0.6 percent, Paris shed 1.1 percent and Frankfurt was down 1.3 percent.

The losses followed a sell-off in Asia, which came at the end of a broadly positive week in spite of tit-for-tat threats of tariffs between China and the United States.

Hong Kong fell 0.8 percent after a four-day win streak, while Tokyo shed 1.3 percent and Sydney lost 0.3 percent. Singapore, Seoul, Taipei, Mumbai, Manila and Bangkok also lost ground. However, Shanghai ended the day marginally higher.

With few major catalysts in the trade stand-off, focus is now on the release later in the day of US consumer price index data for July, which will give an idea about price pressures across the country and help guide the Federal Reserve in its interest rate plans.

The central bank is tipped to lift borrowing costs twice more this year, having already hiked two times so far as Donald Trump’s massive tax cuts kick in and the economy continues to hum along.

“If the US consumer prices data for July confirms a steady rise in inflation, it will support the dollar on the back of speculation that the Federal Reserve will hike interest rates again in September,” said Kengo Suzuki, forex strategist at Mizuho Securities.

Chicago Fed President Charles Evans backed “somewhat restrictive” rate levels to offset the fiscal stimulus, citing the possibility of inflation hitting 2.2 percent. Evans had previously voted against hikes on concerns that inflation would not hit the Fed’s two percent target.

“When doves are hawkish we have to take a little notice,” said Greg McKenna, chief market strategist at AxiTrader.

The dollar was up against most other units, sitting at a more than one-year high against the pound. The euro tumbled on concerns about the crisis in Turkey.

The South Korean won and Australian dollar were down about one percent against the dollar while Indonesia’s rupiah and the Mexican peso were also well off.

The Russian ruble tumbled again and is now five percent down since the US on Wednesday hit Russia with new sanctions over its alleged involvement in a nerve agent attack in Britain.

- Key figures at 0720 GMT -

Tokyo - Nikkei 225: DOWN 1.3 percent at 22,298.08 (close)

Hong Kong - Hang Seng: DOWN 0.8 percent at 28,366.62 (close

Shanghai - Composite: FLAT at 2,795.31 (close)

London - FTSE 100: DOWN 0.6 percent at 7,700.03

Euro/dollar: DOWN at $1.1450 from $1.1529 at 2100 GMT

Pound/dollar: DOWN at $1.2755 from $1.2826

Dollar/yen: DOWN at 110.85 yen from 111.09 yen

Oil - West Texas Intermediate: DOWN 49 cents at $66.32 per barrel

Oil - Brent Crude: DOWN 40 cents at $71.67 per barrel

New York - Dow Jones: DOWN 0.3 percent 25,509.23 (close)