Turkey's lira fell as much as 12.7% and touched a new all-time low of 42 to the dollar on Wednesday, with bonds and stocks also tumbling sharply, after authorities detained President Tayyip Erdogan's main political rival.
The move against Ekrem Imamoglu, the mayor of Istanbul, was called "a coup attempt" by the opposition and appears to cap an aggressive months-long legal crackdown on opposition figures across the country which has been condemned as a politicised attempt to silence dissent.
Imamoglu was expected to be named as the main opposition's presidential candidate within days.
The lira traded at 38.90 to the dollar at 1016 GMT, from a close of 36.67 on Tuesday, having recouped some of the losses from the all-time low it hit earlier - but still having had its biggest decline since July 2023. The earlier tumble to 42 marked one of the lira's largest absolute intraday moves on record.
Turkey's international government bonds also came under pressure with longer-dated maturities suffering the sharpest falls.
"In Turkey this morning, bonds and FX are coming under pressure after a potential presidential candidate, the mayor of Istanbul, was arrested," said Frantisek Taborsky, EMEA FX & fixed income strategist at ING.
"(Turkey's lira) is the most heavily positioned carry-trade in the emerging markets space at the moment in our view, and a sharp move could potentially lead to further outflows. On the other hand, we should see local banks providing some FX support."
Finance Minister Mehmet Simsek said they were doing everything necessary to ensure healthy functioning of the markets, without giving further details.
Bankers calculate that the Turkish central bank sold a minimum of $5 billion in FX after lira's crash, while some say it may have already reached $10 billion for the day.
Analysts and investors were also concerned about the knock on effect for monetary policy, worrying that the sharp decline in the lira could delay or halt the rate-cutting cycle since the central bank has been ensuring real appreciation of the currency for months.
The central bank had in December embarked on an easing cycle for the first time after an 18-month tightening effort that reversed years of unorthodox economic policies and easy money championed by Erdogan, which had seen the economy run red hot and inflation exceeding 70%. Erdogan has supported the steps by the central bank for a more orthodox policy.
"With this FX shock they need to keep rates where they are for now," one banker said.
Stocks also crashed, reflecting investor worries over rule of law. Turkish blue-chip stocks (.XU100), opens new tab fell by nearly 6%, set for their worst daily performance since late 2023.
The banking sub-index (.XBAN), opens new tab declined 9.67%. Borsa Istanbul said trading was halted temporarily after the main BIST 100 index fell 6.87% in early trading and the market-wide circuit breaker was triggered.
"A wave of selling was triggered after Imamoglu's diploma was annulled and he was detained. There have been foreign investor inflows in recent days ... but political uncertainty currently prevails and concerns about foreign investors leaving the country have increased," Serhat Baskurt, algorithmic operations manager at ALB Yatırım, said.
Baskurt said he expected the decline on the stock exchange to continue over the coming days.
Borsa Istanbul said that the uptick rule on short sale transactions for the BIST 50 index would be used on Wednesday. The rule requires short sales to be conducted at a higher price than the previous trade.
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Start your day informed with AnewZ Morning Brief: here are the top news stories for April 15th, covering the latest developments you need to know.
Asian markets edged higher on Tuesday, lifted by gains in auto stocks after US President Donald Trump suggested he might ease tariffs on vehicles.
Turkish Foreign Minister Hakan Fidan spoke with US Secretary of State Marco Rubio by phone, discussing the situations in Syria, Gaza, and efforts for a Ukraine ceasefire, according to diplomatic sources.
NORAD has monitored a Russian military aircraft operating in the Alaskan Air Defense Identification Zone, confirming it remained in international airspace and posed no threat.
The European Union is drafting its 17th package of sanctions against Russia, to be discussed at a foreign ministers' meeting in May, according to the bloc’s foreign policy chief Kaja Kallas.
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