The Turkish lira has recovered some of its recent losses against the dollar this week, but analysts warned the currency is in for a bumpy ride as the US threatened to impose sanctions on Turkey.
The lira rose to 5.8 per dollar, a significant improvement from its record low of 7.23 per dollar, aided by a $15bn (£12bn) investment by Qatar.
However, analysts warned that sanction threats could mean more volatility in the lira lies ahead.
The US and Turkey are currently locked in a diplomatic dispute over the detention of American pastor Andrew Brunson, who is accused of playing a role in a failed coup in Ankara two years ago.
On Thursday, the US Treasury secretary Steven Mnuchin told President Trump that sanctions were ready to be put in place if Mr Brunson was not freed.
Mr Trump later said in a tweet that the US would “pay nothing for the release of an innocent man” adding that the US is “cutting back on Turkey”.
“While the lira has scope to claw back more losses, gains may be capped by the ongoing uncertainty,” warned Lukman Otunuga, research analyst at FXTM.
Meanwhile, Per Hammarlund, chief emerging markets strategist at SEB, said the rebound in the lira is expected to be temporary because “the basic reasons for... weakness are still in place”.
“The selloff will resume in the absence of a major shift in economic policy-making in Turkey,” he said.
“Turkish finance minister Berat Albayrak continues to reassure investors that Turkey will address its structural problems, but at this stage crisis measures, including sharply higher policy rates, a tightening of fiscal policy and support to troubled sectors such as construction, retail and banking will be key. In sum, the economy is set to slow down sharply.”
Mr Hammarlund added: “Unless the government introduces an austerity programme within the next weeks, an event such as sharply higher inflation (likely) or a large fine on Halkbank for violating US sanctions on Iran (possible) could trigger a full-blown balance of payments crisis, followed by a banking crisis.
“So far, the government has shown few signs of being willing to change course, either on economic policy or in its relations with the US. The lira is in for a bumpy ride.”
