World stock markets fell Friday, particularly in Europe, as investors anxious about the financial stability of Turkey, where the currency has nosedived.
UBS chief economist for EMEA emerging markets Gyorgy Kovacs said a giant rate hike of 350-400 basis points would be "consistent with real rate levels that in the past helped to stabilise the currency" but warned a deal to normalise ties with the USA may also be needed. The lira, which has been losing ground in recent days in part due to the USA tensions, plunged as much as 20 percent on Friday to record low levels against the dollar.
Compounding the lira's agony, President Donald Trump said he had doubled steel and aluminum tariffs on Turkey, noting that relations between the North Atlantic Treaty Organisation allies were "not very good".
USA manufacturers that import steel from Turkey have been benefiting from the rising value of the dollar against the Turkish lira, which climbed to a fresh all-time high Friday.
In the New York Times, Erdogan warned Washington not to risk relations with Ankara, saying his country would otherwise look for "new friends and allies". While many of Turkey's challenges are specific to that country, there are certain characteristics - a heavy debt load following a prolonged, low USA interest-rate driven borrowing binge in dollars - broadly shared throughout emerging markets.
But Erdogan vowed there would be no easing of the law in Brunson's case, saying: "We have not made concessions on justice so far, and we will never make any".
The new duties on Turkey are double the level that Trumpimposed in March on steel and aluminum imports from a range ofcountries.
While Fed officials are quick to stress they are focused on the domestic economy, any emerging market slump large enough to spill over into Europe or the United States would be significant enough to give policymakers pause about ongoing monetary tightening. He said this during a speech in the town of Unye (Turkey).
It's an awkward triangle, given that Turkey is a Nato member, Russian Federation is Nato's number one threat and the organisation is obliged to defend any member that is attacked.
"If there is anyone who has dollars or gold under their pillows, they should go exchange it for liras at our banks".
Turkey and the US are now experiencing rocky relations following Washington's imposition of sanctions on Interior Minister Suleyman Soylu and Justice Minister Abdulhamit Gul for not releasing American Pastor Andrew Brunson, who faces terrorism charges in Turkey. He also stressed that there are no politicians or countries around the globe that would succeed by pursuing a hostile policy towards Turkey.
There are now fears the weakening lira will see Turkish companies that borrowed heavily in the country's construction boom struggle to repay loans in dollars and euros.
Mr. Erdogan says the coup was orchestrated from the United States, and specifically by a Muslim cleric, Fethullah Gulen, from his self-imposed exile in Pennsylvania.
Alex Dryden, global markets strategist for JPMorgan Asset Management, said Erdogan showed no signs of changing course Friday, and investors are losing hope that Turkey's government has the knowledge or independence needed to deal with the country's financial problems. Brunson has been detained for the past 20 months on accusations that he supported groups the Turkish government deems terrorists. The lira fell further after Mr Trump's tweet.