Dollar Archives - Politics Today https://politicstoday.org/tag/dollar/ Tue, 30 Jun 2026 06:30:22 +0000 en-US hourly 1 https://wordpress.org/?v=6.4.8 Survey: Central Banks Plan to Cut Dollar Reserves as Gold and AI Gain Prominence https://politicstoday.org/survey-central-banks-plan-to-cut-dollar-reserves-as-gold-and-ai-gain-prominence/ Tue, 30 Jun 2026 06:30:22 +0000 https://politicstoday.org/?p=30414

Survey by Official Monetary and Financial Institutions Forum signals first recorded long-term shift away from the U.S. dollar.

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entral banks around the world are planning to reduce their holdings of U.S. dollars over the coming decade for the first time, reflecting growing concerns over geopolitical risks and policy uncertainty surrounding the world’s dominant reserve currency, according to a new survey released on Tuesday.

The findings, published by the Official Monetary and Financial Institutions Forum (OMFIF), mark the first time its annual survey has found that more central banks intend to decrease their dollar allocations than increase them over the next 10 years.

The survey, which gathered responses from 90 central banks, sovereign wealth funds and public pension funds managing a combined $10 trillion in assets, points to a gradual transformation in global reserve management as policymakers prepare for a more fragmented international financial system.

Although the U.S. dollar remains the world’s primary reserve currency and has gained around 3% this year, respondents increasingly cited political uncertainty in the United States and rising geopolitical tensions as reasons to diversify their portfolios.

The shift comes amid broader debate over the future of the global monetary system following heightened international tensions, including the recent U.S.-Iran conflict, and changing global economic dynamics.

OMFIF Senior Economist Yara Aziz said public investors increasingly regard market volatility as a permanent feature rather than a temporary disruption.

“The old assumption that public investors can wait for the environment to normalize looks increasingly unrealistic,” Aziz wrote in the report.

Read: Is the Dollar’s Throne Shaky?

Gold strengthens its role in reserve management

Despite expectations of reduced dollar holdings, the survey found no clear replacement for the U.S. currency.

Instead, reserve managers are gradually expanding holdings across a wider range of currencies while significantly increasing allocations to gold.

Nearly four out of five central banks surveyed, along with 60% of public investment funds, believe the international monetary system is evolving toward a more multipolar structure in which reserve assets become more diversified.

Currencies outside the traditional major reserve group are attracting greater attention.

Respondents reported increasing allocations to the Norwegian krone and the New Zealand dollar, while interest in the British pound also continued to grow.

Central banks also maintained plans to increase holdings of the euro and China’s renminbi, although respondents said structural limitations continue to constrain both currencies from becoming dominant alternatives to the dollar.

Even so, almost all respondents viewed the Chinese yuan as an effective tool for portfolio diversification.

Gold emerged as one of the strongest beneficiaries of changing reserve strategies.

Held by 82% of surveyed central banks, the precious metal has moved to the center of reserve management policies after reaching successive record highs over recent years.

In the next one to two years, gold is expected to see the largest increase in allocations among reserve assets, with a net 30% of respondents planning to expand their holdings.

Analysts say central banks increasingly value gold as a hedge against inflation, geopolitical instability and financial market volatility.

Read: Central Banks Rush to Gold Reserves and the De-dollarization Nexus

Artificial intelligence reshapes investment strategies

Beyond reserve diversification, the survey highlighted a rapid acceleration in the adoption of artificial intelligence across public financial institutions.

More than two-thirds of central banks said they plan to expand the use of AI in the near future, while none of the advanced economy central banks surveyed indicated they were satisfied with current levels of AI deployment.

Overall, only 9% of central banks said existing AI integration met their needs.

Most institutions currently use artificial intelligence for data analysis, research and administrative functions, although adoption varies significantly between developed and emerging economies.

Nearly 90% of central banks in advanced economies already use AI, compared with just 44% of those in emerging markets.

The report also found growing investor interest in physical assets.

Almost 60% of public investment funds intend to increase allocations to infrastructure and real estate over the next two years, making them the most popular asset classes outside traditional financial markets.

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Emerging markets are also attracting renewed attention

Thirty-eight percent of public funds plan to increase investment in emerging economies, up sharply from 27% in last year’s survey.

At the same time, interest in expanding exposure to developed economies declined significantly, with only one-quarter of respondents planning to increase allocations compared with nearly half a year earlier.

Despite diversification efforts, the United States and China remained the most attractive investment destinations, largely because of their leading positions in artificial intelligence development and technological innovation.

The survey suggests that while the U.S. dollar is likely to remain the world’s dominant reserve currency for the foreseeable future, central banks are increasingly seeking broader diversification through gold, alternative currencies, emerging markets and new technologies to navigate a more uncertain global economic environment.

(Source: Reuters)

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]]> Is the Dollar’s Throne Shaky? https://politicstoday.org/is-the-dollars-throne-shaky/ Mon, 10 Nov 2025 07:17:14 +0000 https://politicstoday.org/?p=29663

Although the dollar still reigns supreme today, the leading actors in the global system are aware that its dominance is waning.

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or nearly 150 years, the symbols on the U.S. dollar have been one of the most heated topics of debate. Since 1776, some have attributed mythological, philosophical, and secret society dimensions to these symbols. Others have argued from a historical perspective that the Founding Fathers designed the currency to convey important messages about establishing a state.

We will not venture into conspiracy theory narratives. It is important to note that the symbols on the U.S. dollar in circulation at that time recalled the founding vision of the United States: a “unfinished” yet forward-looking project. Considering that the founders and citizens of the United States were religious, they also wished to emphasize that God was with them in this process.

Read: Bitcoin: The New Global Reserve Currency?

The U.S.’s ‘high ideals’ narrative has lost its credibility

However, the rhetoric of the “high ideal” behind these symbols has lost credibility due to the U.S.’s increasingly aggressive, arrogant, and empathetic behavior over the past 15 years. This behavior has caused a sense of injustice and inequality in the global economic and political systems, as well as political and economic crises. While the symbols on the U.S. dollar claim “perfection,” today’s practical reality seriously questions this standard. This situation has triggered a process in which the U.S. dollar’s reputation is being called into question.

Even though the Republican Party holds a majority in Congress, the failure of some Republican members of the House of Representatives to be convinced by President Trump’s budget approach has blocked the approval process for the additional spending budget required by the federal government. Meanwhile, the Democrats are seizing this opportunity to pressure President Trump in exchange for steps they want to see taken in the areas of social security and healthcare. A shutdown of the U.S. federal government would be seen as a development that goes beyond internal political deadlock in Washington, affecting the global economy.

Because this shutdown is also a kind of admission that the record-high federal public debt, exceeding 38 trillion dollars, has now reached an unmanageable threshold. However, the real issue did not begin with today’s crisis; it stretches back to the signs of the dissolution of a nearly century-old ‘dollar empire’. It is also noteworthy that President Trump has experienced the longest shutdown among presidents since 1980, both during his first term and now. This whole picture has also undermined global confidence in U.S. federal bonds, causing the total reserves held in U.S. dollars and U.S. federal bonds by the world’s leading central banks to fall below gold reserves for the first time since 1996.

Washington is struggling to resolve the federal budget deficit issue. This situation raises the prospect of taking radical measures to reduce the budget and trade deficits or issuing federal bonds at higher, more attractive interest rates to make U.S. federal bonds appealing again in the coming period. The latter would further increase the burden of interest payments, which have already surpassed the total defense spending of $980 billion at $1.1 trillion. Therefore, the reputation of the U.S. dollar, confidence in the dollar, and the appeal of U.S. bonds are facing a severe test in the near future.

Read: Russia and China Settle 99% of Trade in National Currencies

The Dollar struggles to maintain its status as a reserve currency

However, the rhetoric of the “high ideal” behind these symbols has lost credibility due to the U.S.’s increasingly aggressive, arrogant, and empathetic behavior over the past 15 years. This behavior has caused a sense of injustice and inequality in the global economic and political systems, as well as political and economic crises. While the symbols on the U.S. dollar claim “perfection,” today’s practical reality seriously questions this standard. This situation has triggered a process in which the U.S. dollar’s reputation is being called into question.

Immediately after World War II, the United States represented approximately half of the global economy. European cities were in ruins, Japan had been devastated by atomic bombs, and much of the world’s production capacity had relocated to North America. Washington made this economic supremacy permanent by designing a new international economic and monetary order and by implementing reconstruction plans. Established in 1944, the Bretton Woods System was a system in which the U.S. dollar was pegged to gold and all other currencies were pegged to the dollar. Thus, the dollar became the financial architect of the postwar reconstruction of the world, as well as its hegemonic symbol.

For the next 80 years, the world economy largely revolved around the dollar. Europe’s recovery, Japan’s economic boom, the acceleration of globalization, the pricing of energy trade in dollars, and the policy frameworks of the International Monetary Fund (IMF) and the World Bank were all pillars of this “dollar-centric world order.” The dollar was not just a currency but also a symbol of the ideological, financial, and strategic processes Washington defined as the “American Century.”

Today, 80 years later, we are witnessing these pillars crumble. The U.S. debt spiral, interest burden, and expansionary monetary policy are seriously eroding the dollar’s status as a “safe haven.” Furthermore, the rise of Global South countries and new cooperation platforms, such as BRICS, focusing on developing non-dollar international payment systems reinforce the idea that the dollar’s imperial days are behind it.

Washington has taken discussions about the dollar’s dominance being threatened and the BRICS countries’ attempts to establish a new international payment system outside the dollar so seriously that it perceives them as not only an economic challenge, but also a “casus belli,” or cause for war. This is because any erosion of the dollar’s global dominance would signify the dissolution not only of America’s financial power, but also of its geopolitical influence. Consequently, every tremor in the dollar’s dominance today signals a new era in which the 1945 global order is being reexamined.

Read: Central Banks Rush to Gold Reserves and the De-dollarization Nexus

Interest rate spiral: Debt, budget and FED tension

The U.S.’s $38 trillion debt is more than just a figure; it is a rising alarm signal at the heart of the global economy. For the past few years, both the IMF and the World Bank have warned that the significantly increasing debt burden in both developed and developing economies poses a major risk to the world economy and the global financial system. By 2025, interest payments on the debt will surpass $1 trillion for the first time in history, exceeding the country’s $980 billion defense budget. In other words, the U.S. now spends more on interest on its debt than on its own military. This situation threatens the U.S.’s fiscal sovereignty and growth potential.

Debt ceiling debates have become an almost annual political tragedy. Disputes between political parties in Congress shake not only the federal budget, but also the global credibility of the dollar. Markets now respond to every shutdown announcement by adding a risk premium. Each time the U.S. Treasury approaches its borrowing limit, the global foundations of the dollar are shaken as well.

In its latest report, the IMF stated that the U.S.’s growing debt could pose a “systemic risk” to global financial stability. IMF experts say that the “high debt–slow growth combination” creates fragility within the U.S. and in dollar-based financial chains. The Peterson Foundation for Global Policy (PGPF) emphasizes that, if this trend continues, investment, employment, and wage growth in the U.S. economy will be severely constrained.

Donald Trump’s reaction is growing alongside this challenging financial situation. He targets Fed Chairman Jerome Powell as “the face of the interest rate lobby in Washington,” arguing that the high-interest-rate policy is “a mistake designed to destroy the U.S. economy.” Trump’s rhetoric is certainly not limited to economic policy. He also frames the debt crisis as a matter of national sovereignty. This transforms the U.S.’s fiscal discipline problem into a direct political identity crisis.

Read: Sri Lanka to Allow Indian Rupee in Local Transactions

The Dollar’s global prestige eroding

From the end of World War II to the end of the Cold War, the dollar was the backbone of the global economic system for 50 years, from 1945 to 1995. Eighty percent of world trade and 70 percent of foreign exchange reserves were denominated in dollars. The period between 1995 and 2005 was a transitional period. During this time, U.S. federal bonds denominated in dollars surpassed gold for the first time in the reserves of world central banks. In 1999, the euro was introduced as the common currency of the European Union. In 2001, China joined the World Trade Organization. During this time, the weight of the euro and other leading currencies in central bank reserves gradually increased.

After 2005, and especially following the 2008 global financial crisis, the U.S. dollar’s weight in the international system dramatically declined. The only reason the U.S. dollar maintained any weight in the global system was because the European Union mishandled the 2008 crisis, missing the opportunity for the euro to become a new “international reserve currency.” Over the last 10 years, in particular, the dollar’s share of global foreign exchange transactions has fallen from 60 percent to 40 percent. Meanwhile, the dollar’s share of central bank reserves has fallen to 58 percent, while gold’s share has surpassed that of the dollar for the first time since 1996.

In its July 2025 report, the U.S. Federal Reserve (FED) acknowledged that, despite the dollar remaining the largest reserve currency, a “wear and tear trend” had become apparent. Meanwhile, the IMF noted that increased geopolitical risks and sanctions had “undermined the dollar’s neutral reserve function.” Since the Obama presidency, Washington’s use of the U.S. dollar and the dollar-denominated international payment system as threats and sanctions has severely damaged the dollar’s neutrality. This has also revived the self-preservation instincts of Global South countries, effectively dismantling the “Washington Consensus.”

With the emergence of new blockchain-based payment systems being tested, the era in which the U.S. was alone in its ability to influence world trade has ended. “Multiple payment systems” have become the new norm. The most obvious reason for the dollar’s loss of international prestige is the U.S.’s transformation of its currency into a foreign policy weapon. This approach gained momentum in Washington after 2012 and has accelerated the perception of the dollar as an “unreliable” payment instrument, particularly in Russia, China, Iran, and, more recently, some Southeast Asian countries. This perception is due to dollar-based economic and trade sanctions, restrictions on SWIFT access, and practices that limit the targeted use of dollar-based financial chains.

Let us not forget that international investment funds are closely monitoring this economic and political rupture. According to JP Morgan’s 2025 Global Foreign Exchange Markets Report, the proportion of dollar assets in developing countries’ portfolios has fallen by 15 percent over the past five years. During that same period, the value of the Chinese yuan, the Indian rupee, and the local currency bonds of the Gulf countries have risen rapidly. These changes suggest that the dollar’s long-term reserve status is no longer guaranteed.

Therefore, Washington’s strongest argument for protecting the dollar’s nearly 80-year reign, the “no alternative card,” has weakened for the first time. The dollar certainly remains strong due to its liquidity in global markets, deep market, and institutional credibility. However, that old spell is fading. Washington has overlooked the fact that we are in a period where the dollar is experiencing an economic and moral loss of value.

Read: Can BRICS Challenge the Global Political System?

Debt burden also pulls down the Dollar

The U.S. debt crisis has become a structural problem that undermines the dollar’s value. The global reputation of the dollar relies on U.S. bonds being considered a “risk-free asset.” However, with a debt exceeding $38 trillion, confidence in U.S. bonds has become questionable. The world’s leading central banks have accelerated the diversification of their reserve portfolios. Many central banks, including those in China, Russia, Türkiye, India, Kazakhstan, Poland, and Thailand, are reducing their holdings of U.S. bonds while increasing their holdings of gold, energy assets, and local currency bonds. In the wake of two black swans—the global virus pandemic and the effects of the Russia-Ukraine War—this process has essentially brought the concept of financial geopolitics to the fore.

The IMF emphasizes that high debt and permanent interest rates could create a “debt spiral–dollar shock” cycle. Rising debt increases interest rates, and rising interest rates increase borrowing costs. This situation limits the U.S.’s growth capacity by curtailing public investment. The American economy is stifling its own growth with its interest burden. This scenario has also called into question the dollar’s status as a “safe haven.” Moody’s and Fitch have downgraded the U.S. credit outlook to “negative”; Standard & Poor’s has issued another warning following its 2011 rating downgrade. Market experts emphasize that if foreign investors demand fewer U.S. bonds, the global demand curve for the dollar could shift downward. This would represent a historic turning point for the U.S.

The federal public debt burden has broken a new historical record by exceeding $38 trillion for the U.S. It is no longer just a budgetary concern, but also a source of geopolitical fragility. As confidence in the dollar erodes, so too does the U.S.’s financial supremacy. President Trump recognizes this risk and is working quickly to address it.

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The search for alternatives: BRICS and the multipolar financial era

Countries in the Global South are determined to produce an alternative to the dollar’s hegemony. The BRICS platform is rapidly advancing the idea of a “common reserve currency.” Under the leadership of Russia and China, the BRICS Pay system is developing a non-dollar digital payment infrastructure.

Saudi Arabia, the United Arab Emirates, and Egypt’s alignment with the BRICS structure could challenge the dollar’s monopoly on energy pricing. Trading oil in a currency other than the U.S. dollar, such as the yuan, would mean the breakdown of the “petrodollar system” and the displacement of the cornerstone of the established order since Bretton Woods.

IMF experts note that diversifying reserves beyond the dollar into other major currencies could enhance long-term financial stability, though no single currency has yet emerged to replace the dollar. The European Central Bank (ECB) predicts that the euro and digital currency projects will become more prevalent in international transactions in the coming years. However, for the euro to rival the dollar, the EU will need to make a much greater effort. During the 2008 global financial crisis, the EU squandered a golden opportunity.

This transformation is revolutionary, affecting not only currencies, but also the global financial architecture. Central bank digital currencies (CBDCs), multilateral clearing lines, and regional payment systems are becoming widespread at a rapid pace. The world economy is rapidly moving towards an era in which it will be managed by a network rather than a central authority. The U.S. is closely monitoring this trend. However, Washington’s main concern is that this transformation will diminish the dollar’s role as the “global stabilizer.” Consequently, U.S. financial policies now extend beyond the economic sphere to include defense strategy.

The fundamental truth is that the global economic system is evolving from a single-currency-centered order to a multipolar financial structure. The U.S. debt spiral, government shutdown, interest burden, and political instability could be catalysts for this transformation. Although the dollar still reigns supreme today, the leading actors in the global system are aware that its dominance is waning. This tremor is not solely caused by the size of the U.S. public debt, but also by the erosion of the system’s moral and institutional credibility. The dollar’s transformation from an economic value to a threat and a tool of coercion and sanctions wielded by Washington is the main reason for its fragility. Each debt crisis, government shutdown, and instance of Washington printing money without backing further erodes the dollar’s global reputation.

Research organizations in the field of international economics have reached a clear joint conclusion: although the dollar’s dominance will continue, it will no longer be the only dominant currency. Reports from the IMF, BIS, and the World Economic Forum predict a multipolar financial order by 2030. This shift does not signal the beginning of a new currency war, but rather, the search for a new currency balance.

For Türkiye, this situation requires careful steps as well as strategic opportunities. In the new global context that we call Türkiye’s “Closed Bazaar Metaphor,” leading the way in trade with local currencies, digital payment systems, and regional financial cooperation projects is the strongest expression of economic independence. New maps are no longer drawn with imperialist ambitions, but with hope, justice, and solidarity. The dollar’s throne is shaking, and a new chapter in global economic history is opening.

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]]> What is the Future of the US Dollar? https://politicstoday.org/what-is-the-future-of-the-us-dollar/ Fri, 23 Nov 2018 10:19:47 +0000 https://politicstoday.org/what-is-the-future-of-the-us-dollar/

The unique role of the U.S. dollar will cease to exist in the foreseeable future. This will not happen anytime soon, but it will happen.

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The U.S. emerged out of the ruins of World War II as the world’s hegemonic power. Although the world had divided in political terms back then as the “democratic world” backed by the U.S., and “communist world” backed by the USSR, the U.S. apparently was the “sole” hegemon of the world in terms of economic power and financial outreach. The extent of the economic and financial power of the U.S. was so great that no empire or state the world had seen before could be compared to it. Therefore, we can easily conclude that the most powerful state the world has ever seen by now is certainly the U.S.

As a direct result of this rather unique situation in world history, the U.S. almost singlehandedly shaped the economic and financial system of the world in the immediate aftermath of the Bretton Woods meetings. Although several countries other than the U.S. participated in these meetings, their effect on the final outcome and “agreement” was rather limited. To add insult to injury, the unique and central place of the U.S. dollar in the emergent Bretton Woods system was “never” discussed in the meetings and added to the final agreement by the U.S. itself singlehandedly as if it was a second thought. Yes, because the U.S. was the hegemonic power of the world, its national currency, dollar, became the international reserve currency without any discussion. Other countries had no other option other than to sign this final “agreement.” In the final analysis, it is the U.S. itself who was ruling the roost.

Back then, the unique and central place of the U.S. dollar in the emergent Bretton Woods system was “never” discussed because the U.S. was the hegemonic power of the world.

However, we are not living in such a polarized world in terms of economic/political power. The extremely polarized economic world between 1940s and 1970s gave way to an increasingly multi-polar world and the economic center of the world shifting towards Asia rapidly. That said, the U.S. is still the most powerful country in the world. However, this is not enough to dominate the whole world in economic and financial terms.

The relative power of the U.S. has decreased tremendously since the 1970s and particularly since 1990s. And this has been what had to happen. The world needs to get “flat.” You cannot sustain a world in which some countries have the upper hand indefinitely. Sooner or later things have to change. And we are in this transition right now. It will be very slow to human eyes, but very rapid from the perspective of history.

The share of the U.S. in the world economy was a staggering 40 percent in 1950 according to market prices. It is 24 percent right now. On the other hand, the share of the U.S. economy according to purchasing power parity (PPP) has declined from 27 percent to 15 percent. So, according to both market prices and PPP, the economic power of the U.S. diminished dramatically.

I can assert that we are living in a watershed period, which will shape the future trajectory of the world.

Actually, China has surpassed the U.S. in 2013 and became the biggest economy in the world according to PPP, and it will be so in terms of market prices in the very near future. So, I can easily assert that we are living in a watershed period, which will shape the future trajectory of the world.

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This general framework signals that the unique role of the U.S. dollar will cease to exist in the foreseeable future. This will not happen anytime soon, but it will happen. In a world in which several countries are competing with each other in economic, political and financial terms, a single country could not impose its will as easily as it was the case in the 1940s, where the U.S. was dominating so thoroughly. More to the point, with a diminished relative power, the U.S. cannot afford its national currency to play an international role. Yes, this was the case up until now, but the U.S. will find it increasingly harder and troublesome as its relative economic power dwindles.

We attested that in the last years the U.S. has been using the dollar and U.S.-controlled payment system, as a weapon to promote its political goals. Financial attacks against the Turkish Lira, sanctions against China, Russia and Iran can benefit the U.S. politically or look so to an extent in the short/est term. However, this inconveniently hawkish and shortsightedly bold standing is a colossal mistake for the U.S., which will only expedite the transition from the existing financial/commercial system to another one waiting to emerge.

Using the US Dollar and US-controlled payment system is inconveniently hawkish and shortsightedly bold standing as well as a colossal mistake for the US.

The “rise” of the currency swap agreements between countries around the world is just first steps on the way to a new global economic/financial order. China, Russia, India, Japan and other countries are signing billions of dollars’ worth swap agreements in an effort to use national currencies more in bilateral trade. This is de-dollarization in action. And it will continue to morph into a much broader and bolder multilateral trade agreements in the long run. I now shall answer the question I asked on the title: The future of the U.S. dollar is to revert to a national currency role without a unique place in the global economy/finance.

China, Russia, India, Japan and other countries are signing billions of dollars’ worth swap agreements in an effort to use national currencies more in bilateral trade. This is de-dollarization in action.

This is inevitable.

Then, what will replace the U.S. dollar? Another national currency? Not necessarily. A multi-polar world cannot afford a national currency acting an international currency. This holds for the U.S. dollar and also for… the Chinese yuan. In a multi-polar world, international trade will most probably be conducted via regional clearing unions, which could eventually give way to the international clearing union. And these regional clearing unions will have union-specific supranational currencies such as Bancor, which could eventually coalesce into the international “abstract” currency of the world.

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]]> Politicization of Finance Against Turkey https://politicstoday.org/politicization-of-finance-against-turkey/ Sun, 03 Jun 2018 06:18:13 +0000 https://politicstoday.org/politicization-of-finance-against-turkey/

Ahead of the snap election in June 2018, Turkey is under a severe financial attack. It is quite apparent that Turkey’s macroeconomic indicators are quite healthy, and it is not possible to explain the current financial pressure “economically”.

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Turkey is currently under a severe financial attack. It is quite apparent that Turkey’s macroeconomic indicators are quite healthy, and it is not possible to explain the current situation “economically”.

Attracting foreign investors relies on two main factors: the country’s economic vitality and debt ratio. Naturally, investors want to invest in countries in which they can profit handsomely. At this point, economic vitality comes into play. A country with a high growth rate has a significant potential in terms of investments as it offers high profits for firms. On the other hand, investors expect the country they are lending money to have the capacity to pay off her debts. In this respect, if a country’s debt ratio rises, its capacity to pay off her debts will decline, causing investors to withdraw their investments.

We see that Turkey has a good performance in both of these aspects. First, Turkish long-term annual economic growth rate averages out 4.8%. Moreover, despite the July 15 coup attempt in 2016, the Turkish economy grew 7.4% in the following year, showing an impressive performance and clearly demonstrating her resilience. Hence, Turkish economy is quite vital and naturally attracts investors.

Second, Turkish public debt-to-GDP ratio is around 28.5%, which places Turkey among countries with the least debt load and this ratio is much higher for most of the countries in the world. For example, France’s ratio is 97% while the U.S. and Japan hover around 105% and 253% respectively. On the other hand, Turkey’s budget deficit-to-GDP ratio is approximately 1.5%, despite being in an election year. This ratio is significantly lower than the Maastricht criterion, which is 3%. The same ratio is 2.8% for France and 2.9% for the U.K.

Lastly, Turkish external debt-to-GDP ratio is 53%. When compared to other countries such as Germany (141%), Spain (167%) and France (213%), it becomes apparent that Turkey has a very low level of external debt-to-GDP ratio.

On the other hand, like all economies, the Turkish economy has its own problems. The biggest problem for Turkey for the last two decades is her relatively high current account deficits. However, Turkey has learnt to live with this problem as she has tried to overcome it. Moreover, Turkey’s current account deficit is considerably lower right now than previous years.

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When all of these factors taken into consideration, it is clear that the steep rise in the TL/Dollar exchange rate does not have an economic explanation. Not to mention that the abrupt increase in the exchange rate would require an “equally abrupt” economic cause. We know that there is none. So we are left with politics. The only viable and “abrupt” explanation left is the “surprise” snap elections, which will be held on June 24.

So, how should Turkey respond to this severe financial attack? First, it is wrong to see policy interest rate as almost the sole monetary policy tool, as assumed widely now.  The Argentinian experience is illuminating in this respect. After Argentine Peso lost 15% of her value last month while inflation was around 25%, the Central Bank of Argentina altered the interest rate three times within a week, increasing it from 27.25% to 40%. So, what happened in the end? Argentine Peso lost another 15% of its value.

The Turkish Central Bank (TCMB) increased the de facto interest rate by 300 base points, from 13.5% to 16.5%, on May 23 in order to address the financial attack, resulting in a further tightening in monetary policy and making Turkey an outlier among emerging countries in terms of real interest rate. After the steep rate hike, TL/Dollar exchange rate decreased from 4.80s to 4.40s gradually, only to increase 4.60s again swiftly with no apparent “economic” reason.

To address this “mindless” financial attack, respective ministries, such as the Ministry of Economy, along with the TCMB should establish communication channels with citizens and try to relieve their concerns. On the other hand, both the government and TCMB ought to establish good relations with financial circles that are only economically-motivated. Achieving these, Turkey will be able to weather these financial attacks. At this point, Turkey has an important leverage: the current level of the TL/Dollar exchange rate renders Turkey a tremendously attractive country for investment.

Lastly, it should be noted that TL/Dollar exchange rate will sooner or later return to normal levels, particularly after the snap elections. The Turkish state and the TCMB’s strong communications with both Turkish citizens and financial circles that are “economically motivated” would ease up this process.

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]]> Foreign Exchange Market in Turkey: What is Happening? What Should be Done? https://politicstoday.org/foreign-exchange-market-in-turkey-what-is-happening-what-should-be-done/ Sat, 26 May 2018 00:59:09 +0000 https://politicstoday.org/foreign-exchange-market-in-turkey-what-is-happening-what-should-be-done/

Although there is no serious deterioration in economic indicators, it is obvious that there is an intense effort to worsen the economic perception as snap elections approach. The deterioration of economic perceptions is paving the way for speculative attacks that cause a surge in exchange rates.

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Turkey has been experiencing one of the most severe speculative attacks in its open-economy era since the beginning of May 2018. The Dollar/Turkish Lira parity, which was 4.1 on May 1, rose to 4.92 on May 23. Such a sudden surge on the currency does not reflect the reality of the Turkish economy. There is a strong economic growth performance, fueled not only by consumption expenditures, but also by investment expenditures and export. The Turkish economy created around 1,2 million new jobs in the last year. The unemployment rate is declining, albeit slowly. As in every country, Turkey also has some economic problems – the high current account deficit and double-digit inflation are two main problems of the Turkish economy. These problems are not new, plus they have not shown a significant deterioration for the last two months.

With the loss of the value of the Turkish Lira, rising food and energy prices were the main triggers of this high inflation rate. Since Turkey’s costs of imported intermediate goods and energy soar in periods when the country enters a phase of rapid growth, an increase in its current account deficit is unavoidably being experienced. Reducing the current account deficit and inflation require supply-side structural reforms. The government is aware of that. Turkish Deputy Prime Minister Mehmet Simsek tweeted: “None of Turkey’s macroeconomic problems are insurmountable. We’ve fixed problems in the past, we can do it again.” President Erdogan said that after the election serious measures will be taken without delay to reduce inflation and the current account deficit. In sum, inflation and current account deficit are not acute problems that could cause such a high jump in exchange rates in such a short time period.

So why is the Turkish Lira depreciating? Although there is no serious deterioration in economic indicators, it is obvious that there is an intense effort to worsen the economic perception as snap elections approach. The deterioration of economic perceptions is paving the way for speculative attacks that cause a surge in exchange rates. The international economic press is circulating news suggesting that the Turkish economy is overheating. In addition to this, international media outlets misinterpreted the statements regarding the future of economic management, which President Erdogan had made in interviews during his London visit.

Many economists and analysts claimed that Turkey is moving away from a free-market economy. This is a cock-and-bull story. But this type of distortional or fabricated news made financial investors anxious. The Turkish Lira depreciated with speculative movements. Following, some foreign investors began to sell their Turkish Lira assets even more to offset the loss. When Turkish companies, which have foreign currency-denominated debt, started to buy foreign currencies, the Turkish Lira depreciated even further.

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After an emergency meeting, the Central Bank of the Republic of Turkey (CBRT) raised its late liquidity window rate to 16.5 percent from the previous 13.5. In the speech he made the day the Turkish Lira depreciated, President Erdogan clarified his previous statements as follows: “Turkey is a country that practices free market economy with all its rules and policies. As it is today, we will continue to adhere to global governance principles in monetary policy in the new (presidential) system.” With the statements of President Erdogan and Prime Minister Binali Yildirim, which calmed the financial markets, this rate hike prevented the Turkish Lira to depreciate further. It is not yet over. There will be further speculative attacks before the election. The current level of exchange rate is also disturbing for Turkish companies.

So, what should be done to bring the Turkish Lira to levels that reflect economic reality? First, the CBRT should be more pro-active and take more timely decisions. The last move of the central bank was late. The CBRT should have increased interest rates a week or ten days ago. Until its next meeting, which is on June 7, the CBRT should use forward guidance to steer market expectations and monitor market movements closely. If exchange rates do not loosen as expected, the CBRT should restart to fund the banking system through 1 week repo and tighten its monetary policy further.

Economic ministers should make informative and guiding explanations of the latest developments in the markets and the policy measures taken. The economic management team, including ministers, high-ranking bureaucrats and advisors, should not allow manipulative news circulation on the market by communicating with markets closely. Last but not least, all presidential candidates and political parties should explain their potential economic policies, which will be implemented with the start of the presidential system after the elections.

These are potential short-run policies and moves. In the medium and long-run, Turkey should reduce its reliance on foreign capital inflows by speeding up structural reforms (especially on imported medium- and high-tech intermediate goods, and energy resources) that can reduce its current account deficit, and by diversifying its financial instruments that can increase domestic savings and channel domestic savings to financial markets.

The post Foreign Exchange Market in Turkey: What is Happening? What Should be Done? appeared first on Politics Today.

]]> What are the Prospects of the Turkish Economy? https://politicstoday.org/what-are-the-prospects-of-the-turkish-economy/ Thu, 05 Apr 2018 03:48:22 +0000 https://politicstoday.org/what-are-the-prospects-of-the-turkish-economy/

A developing country such as Turkey needs not an over-valued currency but certainly an undervalued currency. The Turkish Lira had been tremendously overvalued against the Dollar and Euro in the 2000s up until a couple of years ago thanks to the abundant global liquidity and tight monetary policy in Turkey.

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The Turkish economy grew by 7.4 percent in 2017, ahead of China and India, ranking first among the G-20 countries. However, there are some concerns within and outside of Turkey regarding whether the Turkish economy has been overheating or, quite the reverse, whether an economic recession is imminent. These concerns are mostly unsubstantiated.

First, a 7.4 percent of economic growth rate is not too high to justify the overheating thesis, particularly when compared to the long-term average economic growth rate of Turkey (4.7 percent). Moreover, one can argue that the one-quarter slowdown of the Turkish economy in the immediate aftermath of the failed coup attempt has been compensated by the above-average economic performance in the following year.

Second, given the current economic outlook of Turkey, the suggestion of an economic recession could be much more of wishful thinking or scare mongering rather than an informed prediction about the economy. That said, the Turkish economy has its own weaknesses (as well as strengths) as do other economies. Talking about existing economic weaknesses – such as the relatively high current account deficit – as a possible cause of an imminent economic recession, therefore, is not satisfactory at all and lacks a coherent internal logic: Why now? Given that Turkey has had a relatively high current account deficit for the last two decades, she has experienced no economic crisis, apart from the global financial crisis, which emanated from outside and which Turkey recovered more than completely and did so very fast.

There is no perfect economy in the world and no country needs a seamlessly-working economy to avoid a recession or a crisis. What is needed is a relatively healthy economy and the current economic outlook of Turkey does not show any significant sign of unhealthiness. Actually, quite the opposite: The Turkish economy showed its resilience time and again after 2001 and the economic performance of Turkey in that period is quite good, particularly given the global economic situation in the last decade and the continuing hangover of the 2008-09 global financial crisis for a quite number of countries. Actually, given what Turkey has gone through since 2013 in the political sphere, one can easily conclude that the Turkish economy has performed above standards. Therefore, one needs a very good explanation as to why Turkey should fall into a recession in order to be credible.

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Another factor concerning some regarding the Turkish economy is the devaluation of the Turkish Lira against the U.S. Dollar and Euro. Between November 2016 and November 2017, the Turkish economy suffered three distinct financial attacks, which resulted in an elevated volatility in the financial markets and rise in the inflation rate to an extent, besides devaluation. While these factors certainly made a dent in the Turkish economy, their scope was quite limited by nature. Volatility and inflation rates can increase just once after a financial attack and these variables return to their normal levels after a while. The marginal efficacy of financial attacks decreases to a great extent with each additional attack.

Some argue that the devalued Turkish Lira could be a real headache for the Turkish economy in the near future. While there are certainly some downsides of a devalued currency both in the short and long run, there are also important upsides. In addition, given that Turkish banks and firms are in a good shape in terms of their foreign exchange position, thanks to a solid financial infrastructure in Turkey, the downsides of the devaluation of the Turkish Lira is quite limited.

Moreover, a developing country such as Turkey needs not an over-valued currency but certainly an undervalued currency. It should be noted that the Turkish Lira had been tremendously overvalued against the Dollar and Euro in the 2000s up until a couple of years ago thanks to the abundant global liquidity and tight monetary policy in Turkey. Only with the dwindling of global liquidity to a certain extent and with – paradoxically – the aforementioned financial attacks, the Turkish Lira has returned a much more balanced level against the Dollar and Euro. Therefore, there is no reason to be afraid of “normalcy.” Actually, it is the overvalued currency a developing country should be avoiding.

All in all, taking Turkey’s economic history and performance as a guide, with all her weaknesses, the prospects of the Turkish economy are relatively high.

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