Turkey's embattled lira on Friday hit new record lows against the US dollar and euro, losing nearly nine percent in value as strains with the United States showed no sign of abating and fears grew over the exposure of European banks.
The lira was trading at 6.04 to the dollar on Friday afternoon, a loss on the day of 8.9 percent. Earlier, it had crashed some 12 percent through the 6.00 level for the first time in history, trading at one point at more than 6.30 lira per dollar, according to Bloomberg data.
The lira has now lost over a third of its value against both the dollar and the euro this year, with the currency battered by both concerns over domestic economic policy and the political situation.
Versus the euro on Friday the lira lost 10 percent to trade at 7.0.
But President Recep Tayyip Erdogan, who had remained unusually silent all week as the lira bled value almost daily, appeared to express confidence over the situation.
"We will not lose the economic war," state-run TRT Haber television quoted Erdogan as saying.
He called on Turks to support their struggling currency.
"If you have dollars, euros or gold under your pillow, go to banks to exchange them for Turkish lira. It is a national fight," Erdogan said.
The comments had the opposite effect, with the lira falling back below 6.0 to the dollar.
Erdogan had in comments late Thursday raised eyebrows by appearing to play down the magnitude of the crisis, saying: "If they have dollars, we have our people, we have our right and we have Allah!" he said.
- Doubts over central bank -
Turkey remains at loggerheads with the United States in one of the worst spats between the two NATO allies in years over the detention for the last two years of American pastor Andrew Brunson and a host of other issues.
Talks this week in Washington failed to resolve the impasse which has led both sides to slap sanctions on senior officials amid fears of graver measures to come.
Meanwhile, markets are deeply concerned over the direction of economic policy under Erdogan with inflation nearly 16 percent but the central bank reluctant to raise rates in response.
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."
He warned a "rate hike alone might not stem the worries about the US and Turkey tensions and a potential further escalation."
And it remains unclear if the bank would be willing to sharply lift rates with analysts saying the nominally independent institution is under the influence of Erdogan, who wants low rates to keep growth humming.
Erdogan after winning June 24 elections with revamped powers tightened his control over the central bank and appointed his son-in-law Berat Albayrak to head a newly-empowered finance ministry.
"President Erdogan's strengthened powers under the new presidential system have made it increasingly uncertain whether policymakers will be able to act to stabilise the economy," said William Jackson, chief emerging markets economist at Capital Economics in London.
He said the lira's fall was being exacerbated by fears the central bank "isn't being permitted to raise interest rates".
- 'Accelerating speed' -
Concerns were intensified Friday by a report in the Financial Times that the supervisory wing of the European Central Bank (ECB) had over the last weeks began to look more closely at eurozone lenders' exposure to Turkey.
The report said that the situation is not yet seen as "critical" but Spain's BBVA, Italy's UniCredit and France's BNP Paribas are regarded as particularly exposed.
With many Turkish companies have taken out loans in dollars, banks face a higher risk of default.
"Investors have been looking at the unfolding currency crisis in Turkey as a local difficulty, however the accelerating speed of the declines appears to be raising concerns about European banks exposure to the Turkish banking system," said Michael Hewson, chief market analyst at CMC Markets UK.
Albayrak, who formerly served as energy minister, is on Friday expected to announce what he has described as a "new economic model" for Turkey but markets remain sceptical.
The plunge in the lira has featured remarkably little on Turkish television channels and newspapers -- most of which after recent ownership changes are loyal to the government -- with media focusing instead on recent flooding by the Black Sea.