Trump authorized an increase in tariffs on Turkish aluminum and steel products on August 10, while the USA also imposed sanctions on Turkish justice and interior ministers for their alleged role in the arrest American pastor Andrew Brunson, who is under arrest for his alleged links with PKK and Gülenist Terror Group (FETÖ). The U.S. has decried the charges as false and has demanded Brunson be released. Forecasters have expected economic growth to decline since regulators tightened lending controls past year to rein in surging debt. Overnight, U.S. Treasury 10-year yields also dipped to the lowest in just over three weeks at 2.85 percent. That helped Turkey's economy, which grew at 7 percent past year.
At issue is the Central Bank's refusal to raise interest rates in order to tackle double-digit inflation, with Erdogan believing that interest rates are the number one killer of the economy. That draws capital away from Turkey, weakening the currency.
The falling Lira would hit Turkish companies that have to repay foreign currency debt estimated at more than 200 billion US dollars.
Data showed the region's largest economy, Germany, picked up more steam than expected in Q2, although the bounce might have been stronger had surveys from China not proved softer than expected.
Turkey's weakened currency, the lira, plunged by a full 20% in response. Prices are already up 16 percent since a year ago, according to the Associated Press. Amid calls to "burn" the dollars, the group headed to a bank branch where they converted the money, it said.
Does this have effects outside Turkey?
China's economy is showing further signs of cooling as the USA prepares to impose even tougher trade tariffs.
"Turkey is facing an economic war".
The Turkish strongman also pointed out that Turkey was considering other markets and political alternatives to its "strategic partnership" with Washington.
The lira TRYTOM=D3 has lost more than 40 percent of its value against the dollar this year, hit by worries over President Tayyip Erdogan's calls for lower interest rates and fraying ties with the United States.
But analysts have raised concerns of a wider contagion rippling through global markets. But American companies' direct contact with the Turkish economy is quite limited.
Investors are anxious that Turkish companies that borrowed heavily to profit from a construction boom may struggle to repay loans in dollars and euros, since the weakened lira means there is now more to pay back.
Why are Turkey and the U.S. at odds?
Investors were encouraged that USA declines were only minor overnight after the losses by the lira and other emerging-market currencies. "Argentina and Brazil have been hit", wrote Brad McMillan, chief investment officer for Commonwealth Financial Network, on Friday.
"I fear that because the markets are being driven by "animal spirits" stemming from external headwinds, there is very little these central banks can do and it would risk concerning investors even further if they start pushing the "panic" button", he said.