Turkey's lira performed a volte face and bonds bounced back from multi-month lows after President Recep Tayyip Erdoğan welcomed statements on Oct. 25 from several Western embassies, paving the way for the de-escalation of a diplomatic row.
The lira had tumbled as much as 2.4% to a record low early in the day after Erdoğan said on Oct. 23 he had told his foreign ministry to expel the ambassadors of the United States and nine other Western countries for demanding the release of philanthropist Osman Kavala.
Though the currency pulled back from the brink after Erdoğan made comments on his way to a cabinet meeting called to discuss the rift. He told state media he welcomed pledges by several Western embassies to abide by a diplomatic convention not to interfere in a host country's internal affairs.
The lira strengthened 0.7% in the wake of the comment and was seen by analysts as an attempt to cool diplomatic tensions.
The lira had already come under sustained pressure last week after the central bank delivered a surprisingly sharp 200 basis point rate cut last week, stoked market volatility and also sent Turkey's sovereign dollar bonds tumbling.
However, dollar bonds marked a similar reversal, pulling back from losses that had pushed them to multi-months low early on Oct. 25 to gain as much as half a cent in the dollar, Tradeweb data showed.
The lira has lost over 22% of its value so far this year in a sell-off that had accelerated after the central bank eased policy, despite rising inflation, in a shock move derided as reckless by economists and opposition lawmakers.
Notwithstanding the bruising year for Turkish markets so far, analysts predict that the central bank will continue to cut interest rates despite inflation being set to accelerate due to the plunging lira and rising energy prices. The next policy meeting is scheduled for on Nov. 18.
Erdoğan's political opponents said his call to expel the ambassadors was an attempt to distract attention from Turkey's economic difficulties.
Separately, state lenders Ziraat Bank, Vakıfbank and Halkbank lowered their loan rates by up to 200 basis points, confirming a Reuters report on Oct. 24.
Analysts said the move could support some borrowers but also exacerbate pressure on the lira and the economy, given that Turkey's benchmark bond yields shot up after the central bank slashed its policy rate by 200 points to 16% last week.