It is very hard to predict what course the exchange rate will take due to the recent sharp upward and downward movements in the dollar rate. A major reason behind the volatility of the rate is that any event that occurs — whether related to the economy or not, whether it was anticipated or not — has a strong impact on financial markets in the short term, which might lead to unpredictable movements in the rate. This makes short-term forecasting nearly impossible. However, it is possible to answer the question of the dollar’s future course for those looking for an answer in the medium-term.
After the sharp rise in the dollar against the lira in October, the Central Bank put the brakes on rate cuts that had been in place since March. Who knows what the course of the dollar rate would have been if rate cuts had continued regardless of the recent economic and current developments?The Central Bank move to go easy on rate cuts for a while has reduced the heat off the dollar to a certain extent. The dollar rate had reached 3.1130 prior to the Central Bank’s decision, after which it fell to 3.0495. In the aftermath of the decision, the rate settled in between 3.07 – 3.09. In other words, we have saved the day for now. But as time goes on, this short-term level can give way to a soar in the value of the dollar against the lira once again because the Central Bank has been able to eliminate only one of the reasons behind the heat of the dollar; all of the other factors remain in place.
Political factors have highest influence on dollar rate
Factors outside the economy, such as political, foreign policy and regional risks also play a role in the rise of the dollar. Without these factors moving out of the picture, expecting the rate to slacken seems futile. Economists note that an expected referendum to adopt a new Constitution to introduce a presidential system in Turkey, and rumors that the general elections will be held at an earlier time than planned indicate that the dollar will continue its rise. Experts say that in addition to these domestic political factors, warfare in Syria and Iraq and the expected redrawing of borders during the process and Turkey’s involvement in all of this, also are factors that will contribute to higher tension.
Global risks increasingly higher in the near future
In addition to the points above, the previous cut in Turkey’s credit rating and another potential rating cut from Fitch expected in January comprise another negative element for Turkey, which is highly dependant on foreign financing, and its currency. Ambiguities in the US ahead of the presidential election and the unpredictability of FED policy after the elections and also the effects of Brexit likely coming into play in a more pronounced manner in 2017, also pose risks for the economy. It is nearly impossible for the tensions to calm down without these risks getting out of the way. Domestic experts mostly expect the rate to remain around TL 3.18 in the medium term, while foreign banks predict the rate to settle at TL 3.30 – 3.40.
What course will the dollar rate take?
