News Analysis |
The President of Turkey, Recep Tayyip Erdogan, said on Sunday that the reign of the American dollar in global trade needed to come to an end. “Countries should begin trading in local currencies instead”, he expressed while speaking at Turkey-Kyrgyzstan Business Forum in the capital of Kyrgyzstan, Bishkek. “The attack on our country is a clear example of this. They try to cast doubt in Turkey’s strong and solid economy via currency manipulations,” he said, further adding that dependence of the U.S. dollar was becoming a burden in global trade instead of being convenient.
According to the International Standards Organization List, there are over 185 currencies in the world. A global or reserve currency is one that is accepted for trade throughout the world. The most popular is the US dollar, accounting for 64% of all known central bank foreign exchange reserves, followed by the Euro and the Yen. Increasingly, the Chinese Yuan is making inroads in the global market, with China having replaced the US as the number one trading partner in various regions of the world.
The central bank in Turkey is nominally independent but is known to never actually defy Erdogan. Furthermore, the President of Turkey’s son-in-law was made in charge of the ministry of finance.
The Turkish currency, lira, has been taking a beating in recent weeks. At the beginning of 2018, the lira was 3.70 to the dollar but it has gone sharply down last month. The lira took a hammering in August as it plunged down almost eight percent overnight on the 13th of August. After the plunge, there was a genuine fear that Ankara’s economic problems might spill over to neighboring countries. These fears sparked a sell-off of assets across Europe i.e. among those holding the Turkish lira in significant amounts who expected the decline may continue.
There are two reasons being given for this downfall in the Turkish currency. According to Erdogan, an underhand plot is in the work to bring Turkey down to its knees. He has said that the selling off of the lira was an attempt by Western financiers to bring Turkey to its knees. “With God’s permission, we will overcome this,” he told members of this party last month. He even asked Turks to convert hard currency and gold into lira.
However, the explanation given by Erdogan for the decline in the value of the lira has been criticized as an attempt to deflect attention from misguided policies that he himself oversaw. Nora Nueteboom, an economist at ABN Amro, said, “Erdogan’s aim is to improve the economic position of households”, adding that the government wanted to “keep the music playing” even as internal and external imbalances grew. The central bank in Turkey is nominally independent but is known to never actually defy Erdogan. Furthermore, the President of Turkey’s son-in-law was made in-charge of the ministry of finance.
“The markets have lost confidence in the triumvirate of President Erdogan, his son-in-law as finance minister and the Turkish Central Bank’s ability to act as it needs to,” said Charles Robertson, a global chief economist at Renaissance Capital. However, there is some truth in what Erdogan is saying. One-third of bank lending in Turkey is denominated in foreign currencies, according to the Capital Economics consultancy. And Washington has imposed tariffs on the Turkish economy.
The US, on the other hand, has given asylum to Fethullah Gulen, a preacher, imam, writer and the leader of the Gulen movement, a transnational Islamic social movement. Erdogan holds Gulen responsible for the coup attempt. The US maintains evidence needs to be presented before he can be extradited to Turkey.
A 20 percent duty on aluminum and 50 percent duty on steel were imposed by Trump just over a month ago. Ankara, for its part, imposed retaliatory tariffs on imports from the US as well. The imposition of tariffs marks a steep decline in the relationship between the two largest members of the North Atlantic Treaty Organization in terms of military strength.
Tensions have been rising between the two NATO allies over Turkey’s detention of an American evangelical Christian pastor Andrew Brunson for allegedly supporting the group responsible for the attempted coup in 2016. Mr. Bruson has denied these charges. His trial will likely proceed in Turkey as the diplomatic rift continues. The US, on the other hand, has given asylum to Fethullah Gulen, a preacher, imam, writer and the leader of the Gulen movement, a transnational Islamic social movement.
Erdogan holds Gulen responsible for the coup attempt. The US maintains evidence needs to be presented before he can be extradited to Turkey. Ankara has been looking eastwards as its relationship with the US declines. Erdogan said last month, “Some close doors and some others open new ones” adding that Turkey would look to China for finance. Yesterday, Erdogan said that Turkey was in the process of finalizing trade in local currencies with top trading partners such as Russia and Turkey, adding “these past events have shown how right we are.” He even proposed trading with Kyrgyzstan in local currency.
This only signals a turning point in the US-Turkey relationship but possibly a new era in global trade as well. Ever since the Bretton Woods system was established, countries have pegged their currencies to the US dollar via a fixed exchange rate, as long as the US dollar was pegged to gold. President Nixon unpegged the US dollar to gold and since then, floating currencies and corresponding exchange rates have been used. Now, China is set to become the largest economy in the world. Indeed, some might argue it already is the largest economy ever. With US allies like Turkey asking for a trade in local currencies, we may, in fact, be witnessing the beginning of the end of the dollar’s domination.