Turkish lira bank notes. Picture: 123RF/STOCK
Turkish lira bank notes. Picture: 123RF/STOCK

London — A plummeting Turkish lira sent ripples through global equities and emerging markets on Friday, as the rising fear of a wider fallout sent investors scurrying for the safety of assets such as the yen and US government bonds.

The lira fell as much as 12% against the dollar earlier in the day, its worst day since Turkey’s financial crisis of 2001, due to a deepening rift with the US, worry about its own economy and lack of action from policy makers.

The currency is down more than 35% this year, its losses accelerating as the dollar jumped to 13-month highs. That is spreading the fear of its effect on other economies and markets — bank shares across the continent fell and the euro slipped to its lowest since July 2017 as Financial Times quoted sources as saying the European Central Bank (ECB) was concerned about European banks’ exposure to Turkey.

Shares in France’s BNP Paribas, Italy’s UniCredit and Spain’s BBVA, the banks seen as most exposed to Turkey, fell as much as 4%. That took European bank shares down 1.3% while the pan-European Stoxx 600 index fell 0.7%. The MSCI All-Country World index, which tracks shares in 47 countries, was down 0.6% on the day, having erased all its gains for the week. Wall Street was set for a weak open.

"People looking at things this morning are much more aware that there is central [major] contagion risk," said David Owen, chief European economist at Jeffries in London.

"Having said that, what’s happening in emerging markets is leading to risk-free rates being bid for and that includes treasuries, bunds and gilts."

As investors piled into "safe" bonds, German yields hit three-week lows and yields on US 10-year treasuries fell to 2.8913%.

Investors are now awaiting the release of the US consumer price inflation for July for clues on the interest rate outlook and to gauge if new import tariffs were starting to have an impact. The data is expected to show inflation increased 0.2%, after rising 0.1% in June.

The Australian dollar — often viewed as a proxy for global risk appetite because of its commodity reliance — was the biggest faller among developed currencies, down 1% on the day. Going in the opposite direction was the safe-haven Japanese yen, which hit a one-month high against the dollar.

The dollar index, which measures the greenback’s strength against a group of six major currencies, breached the 96 level, taking it to its highest level since July 2017.

Adding to emerging market currency woes was the Russian rouble, which weakened to 67.12 to the dollar.

Overnight it had retreated to its lowest since November 2016 on threats of new US sanctions, weakening beyond the psychologically important 65 to the dollar threshold.

"Other EM [emerging-market] currencies have held their ground against the dollar, having generally been weakening previously," said analysts at Capital Economics.

"In most cases though, we suspect that this resilience will prove temporary," they said, highlighting the expectation of rising US interest rates and worry over growing US protectionism.

In commodities, US crude oil fell 0.5% to $66.51 a barrel, while Brent crude was 0.4% lower at $71.77 a barrel.

Despite the broader flight to safe havens, gold was lower.

Spot gold fell 0.3% to trade at $1,207.15/oz.