Why is the Turkish Lira continuously depreciating? An in-depth analysis of the Lira's devaluation and volatility

As an emerging market currency, the Turkish Lira has developed a unique “triple high phenomenon” over the past decade—high interest rates, high volatility, and high risks—driven by inflation, policy shifts, and geopolitical risks. For investors, understanding the logic behind the Lira’s depreciation is far more important than passively chasing gains or avoiding losses. This article analyzes why the Turkish Lira has become one of the most volatile currencies globally from three perspectives: historical background, economic structure, and political risks.

Turkish Lira: A Quick Look at Historical Challenges and Fundamentals

The Turkish Lira (TRY), the official currency of Turkey, is subdivided into kuruş, with 1 Lira equal to 100 kuruş. Currently, banknotes come in denominations of 5, 10, 20, 50, 100, and 200 TRY, while coins are 1, 5, 10, 25, 50 kuruş, and 1 TRY. It is issued and managed by the Central Bank of the Republic of Turkey (CBRT).

The Lira’s deep scars from history—At the end of 2001, Turkey faced a severe inflation crisis, with the Lira plunging to an alarming rate of 1 USD = 1.65 million TRY. To stabilize the currency system, Turkey implemented major reforms in 2005, exchanging 1 new TRY for 1 million old TRY, and officially renamed the currency as “Turkish Lira” in 2010, phasing out the old notes. This history explains why the Lira has long faced currency value pressures—once economic imbalances occur, market confidence collapses, triggering a chain of devaluations.

As an emerging market currency, the Turkish Lira has relatively low liquidity in the global financial system, and its value is highly sensitive to political developments, interest rate policies, inflation levels, and geopolitical conflicts.

Currency Traps: The “Triangle Dilemma” of Inflation, Policy, and Import Dependence

The ongoing decline of the Turkish Lira is not just short-term fluctuation but the result of long-term interactions among three structural factors.

First layer: Policy Confidence Crisis—In recent years, the Turkish government has adopted unconventional monetary policies, such as cutting interest rates amid rising inflation, which directly undermines trust in the independence of the central bank. As a result, the public and businesses accelerate their withdrawal from TRY, shifting holdings into stronger currencies like USD and EUR, creating a “vicious cycle” that further drives depreciation.

Second layer: Import Dependence Cost Trap—Turkey’s economy is highly reliant on imports, especially energy and raw materials priced in USD. When TRY depreciates, import costs rise, pushing domestic prices higher; rising prices then weaken investor confidence in TRY, exacerbating the downward trend. This creates an inescapable spiral.

Third layer: Political Risk Premium—Recent local elections, unclear policy directions, and unstable international relations have made foreign investors cautious about Turkish assets. The 2024 detention of Istanbul’s mayor briefly triggered market panic, illustrating the market’s sensitivity to political risks.

The combined effect of these three layers determines the long-term downward trajectory of the Turkish Lira.

Recent Performance of the Turkish Lira

Over the past year, the TRY has continued to weaken against the USD. At the start of the year, the exchange rate was around 35–36 TRY per USD, but due to political turmoil, high inflation, and declining policy credibility, it depreciated to about 42:1, a decline of over 20% for the year. Notably, the March political incident caused a sharp short-term plunge, reflecting market fears of uncertainty.

Although the CBRT has attempted to stabilize the currency by raising interest rates, structural issues and high inflation keep the Lira in a high-level depreciation channel.

For Taiwanese investors, the Turkish Lira has become a typical high-volatility, high-risk asset, better suited for understanding its economic background and risks for short-term trading rather than long-term value preservation.

Three Investment Paths and Risk Trade-offs in Turkish Lira

For those interested in participating in the Lira’s fluctuations, there are three main trading channels, each with advantages and disadvantages.

1. Bank Counter Currency Exchange and Cash Holding

Advantages: Low threshold, no leverage, relatively controlled risk. Some Taiwanese banks (e.g., Bank of Taiwan, Mega International, Hua Nan) offer special currency ordering services, suitable for travelers or long-term holders wanting to keep TRY.

Disadvantages: TRY is not a mainstream currency in Taiwan; most banks do not offer TRY accounts directly. Exchange rates are unfavorable, and liquidity is low, making profits from appreciation unlikely. Advance booking is required, and preparation time is longer.

Practical Tip: For travel, inquire about special currency orders; avoid exchanging at Turkish airports, where rates are worse.

2. Futures Market: Niche and High Threshold

CME offers USD/TRY futures (symbol 6M), with a standard contract value of 100,000 TRY. However, these currency futures are extremely niche, with low trading volume and liquidity, and most brokers do not open them to retail investors. Consequently, actual trading opportunities are very limited.

Conclusion: Futures are unsuitable for small investors.

3. CFD Contracts: The Most Flexible Trading Method

Compared to banks and futures, CFDs (Contracts for Difference) have become the most convenient way to participate in TRY fluctuations. By trading USD/TRY, EUR/TRY, and other currency pairs, investors can flexibly go long or short.

Key advantages:

• Online account opening, no need for physical branch visits
• Very low minimum deposit (as low as $50)
• Leverage typically 10x, amplifying gains and risks
• 24-hour two-way trading, long and short positions
• Multiple currency pairs (USD/TRY, EUR/TRY, TRY/JPY, etc.)
• Robust risk management tools

Comparison of TRY Trading Tools and Cost Analysis

Summary: For small to medium investors, CFDs offer the best balance of accessibility, flexibility, and cost efficiency.

Investment Strategies and Outlook

Short-term traders: TRY’s monthly volatility can reach 10%, suitable for event-driven trading. Those with FX short-term trading experience and good judgment can treat TRY as a high-volatility trading instrument.

Medium- to long-term holders: Not recommended. The long-term trend of TRY is depreciation with occasional rebounds; profiting from appreciation is very difficult, with risks far exceeding potential gains.

Prudent investors: If optimistic about Turkey’s long-term reforms, consider a phased approach—dollar-cost averaging into TRY, using technical rebounds for short-term trades, avoiding all-in positions or long-term holdings as assets.

Key Indicators and Monitoring for TRY

TRY remains in a long-term depreciation channel. Although occasional rebounds occur, structural issues persist, making reversal unlikely in the short term. Investors should monitor:

Key events and policy signals:

• CBRT interest rate decisions (rate cuts or hikes directly influence short-term direction)
• Inflation data releases (assess policy effectiveness)
• Political developments and local elections

Risk alerts: If the Istanbul Stock Exchange banking index drops more than 5%, it often signals accelerated foreign capital withdrawal, warning of rapid TRY depreciation.

Exchange rate references: Taiwanese investors can track real-time rates via bank apps (e.g., Taishin, Cathay) or forex websites. Avoid trading during high-volatility peaks.

Summary: Rational Understanding of TRY Investment Opportunities and Risks

While often overlooked by long-term investors, the Turkish Lira’s price movements are clear and driven by identifiable factors, making it a high-risk, high-volatility trading asset. Investors should choose tools and strategies aligned with their risk tolerance, experience, and investment goals.

Core recommendations:

1. Favor short-term trading over long-term holding
2. Prefer CFD contracts for flexibility and cost efficiency
3. Closely monitor political, inflation, and central bank signals
4. Establish risk management measures, such as stop-loss and position control
5. Avoid excessive leverage to control individual trade risks

Finally, the Turkish Lira is not suitable for all investors. Without thorough understanding of its economic background, political risks, and technical features, participation should be cautious or avoided. Rational assessment and informed action are key to surviving in a high-volatility market.