Turkish Love for Dollars Shows First Sign of Abating in Months

(Bloomberg) -- Turkish investors couldn’t ignore the gains by their local currency since President Recep Tayyip Erdogan shook up his economic management, selling a sizable amount of their foreign-exchange deposits for the first time since October.

Real persons’ foreign-currency holdings retreated more than $1 billion in the week that ended on Jan. 15, according to most recent data by the nation’s central bank. That’s the first drop in three months, during which Erdogan’s son-in-law Berat Albayrak resigned as economy czar after the president abruptly ousted the central bank chief.

The lira rallied 16% since then as Erdogan pledged a shift to more orthodox policies, paving the way for serial interest rate hikes by the central bank and an easing of previous restrictions on banks’ lira trading with international institutions. Turks initially drove their holdings of foreign currency -- a traditional hedge against volatility at home -- to record highs before they finally showed first signs of renewed confidence in the lira.

The drop in FX deposits last week “indicates that the sentiment toward the lira among Turkish residents is gradually improving,” Rabobank’s emerging market strategist Piotr Matys said after Thursday’s data.

The shift away from foreign-currency deposits -- occasionally referred to as de-dollarization by Turkish officials who see it as an indicator of financial stability -- may not hold for too long if the lira continues its rally, according to Matys. “The demand from Turkish residents is likely to resurface” once the lira appreciates to “attractive levels,” he said.