Hedge funds turn to Turkish lira amid global currency volatility spike

As emerging-market currencies faced turbulence over prospects of Donald Trump‘s return to the U.S. presidency, hedge funds pivoted to the Turkish lira on Wednesday, making it the only currency in the sector to gain against the U.S. dollar, according to Bloomberg’s report.

The lira climbed up to 0.3% by mid-morning in London, supported by substantial interventions from Türkiye’s state banks, according to sources familiar with the transactions.

State banks support lira, encourage foreign investment

To stabilize the lira, Türkiye’s state lenders sold over $500 million to maintain the currency around the 34.3500-per-dollar mark, traders reported to Bloomberg.

This intervention, largely occurring during Asian trading hours, helped protect the lira from broader declines that hit other emerging-market currencies.

High carry trade appeal, stability draw investors

Foreign funds have been drawn to the lira as Türkiye’s interest rate, currently at 50%, offers substantial carry trade potential. This strategy, where investors borrow in low-interest currencies to invest in high-return currencies, benefits from Türkiye’s high benchmark rate, which is the second-highest globally.

“It makes sense for foreigners to enter lira positions,” noted Onur Ilgen, head of treasury at MUFG Bank Türkiye, citing relatively low volatility in the lira compared to other emerging-market currencies.

Turkish bonds, stocks gain amid lira’s rise

Türkiye‘s asset classes also saw an upswing. The yield on 10-year lira bonds dropped by 13 basis points to 31%, while the Turkish stock market index rose by as much as 3.2%. The lira’s resilience stood out as the Bloomberg dollar index surged 1.7%, marking its biggest rise in four years.

Analysts highlight Türkiye’s attractive high-yield environment

Peter Kinsella, global head of FX strategy at Union Bancaire Privée (UBP), commented that Türkiye’s high carry rate mitigates the impact of the dollar’s rise, suggesting that the lira’s stability will likely endure.

Incredibly high carry is more than enough to offset any dollar move, and as a result, we don’t see lira spot rates moving in any significant manner

Peter Kinsella

With President Recep Tayyip Erdogan‘s longstanding relationship with Donald Trump, analysts have noted that Türkiye could remain appealing to investors betting on a positive bilateral environment as Trump reclaims the White House in elections.