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The Turkish lira has started the week on the back foot after the country’s government became embroiled in a high-profile diplomatic spat with the Netherlands over the weekend – the latest in a series of political controversies that has weighed on its embattled currency.

At publication time, the lira is down 0.35 per cent against the dollar to TRY3.7405 – partially reversing a more than a 1 per cent climb on Friday.

Markets seem to be taking a dim view of the lira in the wake of a major escalation in diplomatic tensions between the Ankara government and the Netherlands after Turkey’s foreign minister was barred from entering the country to address a rally of Dutch AKP supporters ahead of a Turkish referendum in April.

The move to ban Mevlut Cavusoglu’s flight sparked protests by more than 1,000 people outside the Turkish consulate in Rotterdam on Saturday and led to president Recep Tayyip Erdogan of accusing the Dutch government of behaving like “fascists”.

Mr Erdogan called the Netherlands a “banana republic”, saying it would “pay the price” for its actions.

The lira has borne the brunt of market fears over Turkey’s slowing economy, rising inflation and major political overhauls which would concentrate unprecedented power in the office of the presidency, effectively putting an end to the country’s parliamentary system of democracy.

The currency has weakened nearly 7 per cent against the dollar this year – making it the worst major emerging market currency of 2017. A fresh lurch lower for the lira will heap pressure on the country’s central bank which makes its latest interest rate decision on Thursday.

Analysts are expecting no change to the central bank’s three main interest rates this month.

Chart via Bloomberg

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