Chaos in Turkey will be another headwind for the euro, but the fallout for many bank shares may be limited, economists have said.
The dollar jumped against both the euro and sterling, and European stock markets ended lower, as the Turkish lira fell. The Turkish government had failed to stem widespread concerns of financial markets over its economic policy and sanctions imposed by the US.
The euro slumped by 1.1%, at one stage, against the dollar, and fell against sterling, to 89.29 pence. That reversed most of the sharp gains the euro made against the UK currency earlier in the week, amid concerns over a no-deal Brexit.
“Of course, investors are also worried about the implications of Turkey’s problems for the eurozone’s banking system and economy. But while these concerns add to the long list of recent headwinds for the euro, neither the overall exposure of banks in the eurozone to Turkey, nor the direct links between the region’s economy and the country, is large,” said Capital Economics, in London.
“This is also the case for the wider world. The exposure of US and UK banks to Turkey is negligible,” it said.
But the exposure of a small number of eurozone banks to Turkey also took its toll on major European banks’ share prices, online broker, IG, said. In Ireland, the three banking stocks had a mixed day.
The losses for currencies of emerging markets, which can be spooked by events such as the slide in the Turkish lira, were contained.
“Nonetheless, most other emerging market currencies held up quite well on Friday, given the circumstances, typically falling by less than 2% on the day against the dollar,” said Capital Economics.
“And demand for safe havens wasn’t especially strong, either. The yields of 10-year treasuries and Bunds dropped by only about five basis points each. The Japanese yen edged up very slightly against the greenback. And the price of gold was held in check by the broader-based rise in the US currency.
“Our view is that Turkey’s problems will continue to mount, in the face of excessively loose monetary and fiscal policy.
“Despite a vague acknowledgement by the country’s finance minister of the need for somewhat tighter policy, Friday’s plan was devoid of detail and followed an anti-market diatribe from President Erdogan,” it said.