Turkish Lira Drops on Subprime Crisis

From Bloomberg today:

Turkish Lira Drops on Subprime Crisis; World's Worst Performer

By Yon Pulkrabek

Aug. 16 (Bloomberg) -- The Turkish lira fell 4.5 percent, the most of any currency against the dollar, as so-called carry trades unwind amid the spreading credit crunch.

The lira dropped the most since May 2006, leading other emerging-market currencies lower, including Iceland's krona and the Thai baht. Credit-default swaps trading showed the risk of holding corporate bonds increased, and UBS AG's risk index soared to a record on rising volatility in stocks and currencies.

``Turkey is looking very, very risky at the moment,'' said Lars Christensen, senior strategist at Danske Bank A/S in Copenhagen.

The lira traded at 1.3926 to the dollar by 5:50 p.m. in Istanbul, after earlier dropping 6 percent to the lowest since March, from 1.3325 yesterday. Turkey's currency has dropped 7 percent versus the dollar since the beginning of this month.

Turkish bonds declined for a third day, with the ABN Amro NV index of government yields rising to the highest since May.

Turkey's benchmark ISE National 100 Index of stocks fell 7 percent. More than $3.6 trillion has been wiped off global stock markets since June 23.

Turkey ``is the biggest'' European destination for emerging- market funds for many investors, said Lucy Bethell, currency strategist at Royal Bank of Scotland in London. ``People are thinking this crisis is going to be the crisis of the year.''

Crisis Spreads

Investors continued to cut back on riskier investments on signs the U.S. subprime mortgage crisis is still spreading.

Australian mortgage lender Rams Home Loans Group Ltd. failed to refinance $5 billion of short-term U.S. loans, while Canada's Coventree Inc. said it was seeking emergency funding to refinance debt after its units failed to sell asset-backed commercial paper yesterday.

The Polish zloty weakened for a third day, touching a two- month low and recently trading at 3.8345 per euro, from 3.8169.

Hungary's forint fell for a sixth day to 260.28 per euro from 258.73, after earlier sliding to the lowest since November. The Slovak koruna dropped to a 1 1/2-month low against the euro, and was recently at 33.770, from 33.624 yesterday.

``It's the unwinding of'' carry trades, funded by borrowing currencies like the yen more cheaply, that's pushing these higher-yielding currencies down, said Debbie Orgill, London-based senior economist at ABN Amro Holding NV.

The Czech koruna, also used to fund carry trades, rose to 27.557 per euro, from 27.862 yesterday, it's largest daily gain in more than four years.

``The Czech koruna is going to be among the best-supported because it's a regional funding currency,'' said Jon Harrison, strategist at Dresdner Kleinwort in London. ``It's clearly the regional safe haven.''

In the government bond market, the yield on Poland's 4.25 percent note due May 2011 rose 3 basis points to 5.64 percent, while the yield on Hungary's 6.75 percent bond due February 2017 gained 9 basis points to 6.95 percent.