MUFG analysts see mounting downside risks for the Turkish lira against the US dollar as domestic politics and an energy-driven terms-of-trade shock weaken Turkey’s external position. They cite limited foreign-exchange reserve capacity and rising geopolitical uncertainty, and warn that the balance of risks has shifted towards a quicker slide in TRY or a larger one-off devaluation.
They point to faster depreciation in recent months after military conflict between Iran and the US broke out in late February. Reserves, after a sharp drawdown in March, had steadied over the past month before the latest adverse political developments last week, while the Central Bank of the Republic of Turkey is seen as having less reserve ‘ammunition’ to defend TRY. If pressure persists through domestic politics alongside the risk of a worsening Middle East conflict and an energy price shock, MUFG says reserve depletion could amplify selling, lifting USD/TRY towards 50.500 by year end.
Mounting Economic And Political Pressure On The Lira
We see growing risks of the Turkish Lira weakening against the US Dollar in the coming weeks. The combination of domestic political uncertainty and the high cost of energy imports is putting severe strain on the country’s finances. The USD/TRY is currently trading near 46.20, but the pressure is clearly building for a move higher.
The country’s foreign exchange reserves are a major concern, leaving the central bank with little power to defend the currency. Recent data shows net FX reserves have fallen to negative $65 billion, a historically low level that limits any meaningful intervention. This lack of a backstop means any shock could cause an outsized move in the Lira.
Furthermore, stubbornly high inflation, which registered at 78% year-over-year in the latest reading for April 2026, continues to erode confidence. With global oil prices holding firm around $95 per barrel, Turkey’s large energy import bill is widening its current account deficit. This creates a persistent, natural demand for US Dollars that weighs on the Lira.
Strategic Positioning Amid Heightened Volatility
For traders, we believe positioning for further Lira weakness through derivatives is the most direct strategy. Buying USD/TRY call options offers a defined-risk way to profit from a sharp depreciation of the Lira. This allows for significant upside potential if the currency weakens, while the maximum loss is limited to the premium paid for the option.
Implied volatility in USD/TRY options has been rising, reflecting the market’s growing anxiety. Even with higher premiums, we feel the risk of a sudden, sharp devaluation makes owning these options a prudent way to position for the instability we anticipate. We have seen similar patterns historically, such as the volatility spikes around the 2023 election, which preceded major currency moves.
Given these factors, the risk that USD/TRY will accelerate towards the 50.500 level by the end of the year has increased significantly. We would consider options with a 3-to-6-month expiry to capture this potential move. The environment is ripe for either a rapid depreciation or a more drastic one-off devaluation.
