(Bloomberg) -- Turkey’s lira would have appreciated had the central bank not been buying dollars to build up its reserves, Treasury and Finance Mehmet Simsek said, adding that steep currency gains would bring risks amid increased foreign demand for lira assets.

“All sorts of excess are dangerous,” Simsek said in an interview with TRT television on Monday.

The lira was little changed as of 11:25 a.m. in Istanbul, trading at 32.21 per US dollar. Simsek said the currency could have strengthened to below 30 without central bank action. The Borsa Istanbul banking index rose 2%. 

The central bank has improved its net reserve position, excluding swaps, by about $49 billion in the first two weeks of April, giving the country an important buffer against potential external shocks, Simsek said.

Simsek was appointed after national elections last May to lead a sharp overhaul of economic policies to address an inflation crisis, rebuild the foreign-reserves war chest and narrow the current-account deficit. The aim is to also restore Turkey’s standing with international investors, who had abandoned Turkey in droves as it pursued unconventional policies built largely around ultra-low interest rates.

Offshore Swaps

After weakening almost 40% against the dollar in the past year, the lira has started to show signs of stability and even weekly gains recently, posting its longest weekly winning streak since 2021 last week. That signals increased conviction in the policy pivot and could also provide the necessary foundation to begin easing offshore currency swap regulations, according to Simsek.

Such steps would initially be “one-way” and focus on six-month or longer maturity restrictions, he said. Bloomberg earlier reported the details of the discussions to ease those regulations, which have been widely criticized by foreign investors because they make it difficult to hedge against currency risks.

Read more: Turkey Government Studies Easing Access to Offshore Lira

Investors have finally “started to believe” in Turkey’s economic policies and the fight against inflation, Simsek said, adding that there has been “significant” foreign inflows into Turkish assets, including long-term bonds, since local elections at the end of March.

Foreign investors purchased a net $2.8 billion of lira-denominated government bonds in the week through May 10, according to the latest central bank data, marking the biggest weekly inflows into the debt in over a decade. That brought non-residents’ holdings to the highest level since September 2021. 

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