Erdogan Lira Risks Conversion to Sick From Strong

No prime minister in Turkey's modern history has done more to turn the lira into the strong man of the foreign exchange market than Recep Tayyip Erdogan. Traders now bet his threat to invade northern Iraq will turn it into a laggard.

The currency has fallen 0.6 percent since Oct. 9, when Erdogan told the military to prepare to strike bases of the Kurdistan Workers' Party. The order ended the biggest rally in Turkey's lira since before the 1970s, breaking the momentum that made it the best performer this year among 26 emerging markets tracked by Bloomberg. Trading in options shows the lira is now the riskiest currency over the next two months.

The lira's 19 percent appreciation this year to a record 1.18 versus the dollar reflects Erdogan's success in attracting investors and tourists to Turkey, America's stalwart Islamic ally. The economy more than doubled since he was elected in 2003, and the benchmark ISE National 100 Index of stocks has risen five-fold. Now, traders are growing concerned because more than 80,000 troops are poised near the Iraq border, prepared to hunt down Kurdish militants after an Oct. 21 firefight killed more than 35 people.

``Caution will increase and hurt the currency,'' should the nation start ``a large-scale ground offensive and it becomes an operation of several months,'' said Reinhard Cluse, a senior economist in London at UBS AG. The Zurich-based firm is the biggest underwriter of Turkish bonds, according to data compiled by Bloomberg.

irs-finance-advise.com