Surprising dollar forecast from US Bank: Dollar may drop below 30 lira

Wells Fargo, one of the leading banks in the United States, reiterated its outlook on the dollar/TL exchange rate, sharing its belief that the dollar would fall below 30 Turkish Liras in 2025.

At the beginning of 2024, Wells Fargo, an American giant bank, had put forward a cautiously optimistic long-term view of the Turkish lira. In their latest report, they reiterated their constructive long-term views on the Turkish lira “with increasing confidence,” even after the local elections. Wells Fargo stated:

“At the beginning of this year, we officially expressed a cautiously optimistic long-term view on the Turkish lira, marking a significant change in view after years of pessimism. With the local elections behind us and continued commitment to policy and economic orthodoxy, we are reiterating our constructive long-term view on the Turkish lira with increasing confidence.

MARKETS HAVE RESPONDED POSITIVELY TO TIGHTENING CYCLE BY CBRT

Since the start of the CBRT (Central Bank of the Republic of Turkey) tightening cycle, market participants have responded positively to Turkish assets. Credit default swap spreads on Turkish sovereign debt have significantly narrowed, and emerging market sovereign dollar-bond CDS spreads have converged. In fact, since the start of the CBRT tightening cycle, Turkey’s spreads have narrowed by more than 205 basis points, while the EMBI index has only narrowed by 91 basis points.

Additionally, there was political uncertainty before the local elections, leading to a premium for the U.S. dollar compared to the official USD/TRY rate when converting TL to USD. However, with the uncertainty surrounding local elections diminishing, this dollar premium has decreased, and official and unofficial exchange rates have converged, leaving only a small but normal premium for the U.S. dollar.

INCREASING OPTIMISM ABOUT FUTURE OF TURKISH LIRA

In our view, the convergence of exchange rates and the decrease in the dollar premium reflect increasing optimism about the future value of the lira. For the lira, the combination of improving local political dynamics, the independence of a reliable monetary authority, and non-interference in Turkey’s democratic system should result in a stronger currency over time. In this sense, as we have stated before, we reiterate our constructive view on the Turkish lira with even higher confidence this time and believe that Turkey’s currency issues are likely behind us.

However, we believe that there may be occasional bouts of volatility in the lira. Nevertheless, we believe that the volatility in the lira will be temporary – assuming no major political disruptions or reversals in recent policy measures – and that the currency will tend to strengthen by the end of the year.

“WE BELIEVE DOLLAR / TL RATE WILL FALL BELOW 30 TL”

The forecast horizon is currently until the end of the third quarter of 2025. In this regard, we believe that the USD/TRY exchange rate peaked this year and will fall below 30.00 TL by mid-2025.”

This article provides insights into Wells Fargo’s assessment of the Turkish lira’s future trajectory and its potential implications.