There was no sign on Wednesday that the U.S. and Turkey were able to make any progress in resolving a diplomatic impasse after a delegation from Ankara met with top State Department officials. But those talks on Thursday showed no signs of breakthrough. That is because a trade war would make it even harder for Turkey to get the dollars it needs, so the lira would be even less valuable. USA stocks were also rattled.
"We think Turkey may need to approach the International Monetary Fund or seek other external support. The prospect of capital controls now begins to seem a real possibility".
A Turkish man waits to change his USA dollars with Turkish liras inside a currency exchange shop in Ankara, Aug. 10, 2018.
In refusing to change course in his economic plan, "the Turkish president has made a decision to play a game of chicken with the global financial markets", said Aaron Stein, a Turkey expert and senior fellow at the Atlantic Council, a think tank in Washington.
Timothy Ash, senior emerging markets strategist at Bluebay Asset Management told CNBC that Brunson's detention proves how valuable the Christian vote is in America.
Yet all may not be lost for Turkey. To do that, they have to sell lira - worsening the rout.
"When it comes to cornering Turkey to extract certain concessions that undermine our sovereign rights, it is a whole another story". The plunge in the value of the currency coupled with an inflation rate of almost 16% could cause a lot of damage to Turkey's economy.
The lack of selling may reflect "inertia or a lack of liquidity", they go on.
Ankara is under pressure to adopt orthodox steps to protect the lira by aggressively increasing interest rates to rein in double-digit inflation, a move Erdogan has publicly opposed. That drained investor confidence in the central bank, leading to a further sell-off of the currency. The tech-heavy Nasdaq composite was down 83 points, or 1.1%, poised to end an eight-day winning streak. As the currency drops, Turkish companies and households with debt in foreign currencies see their debts expand. He is a fierce opponent of higher interest rates, and backed a wave of fiscal stimulus in the run-up to his re-election in June.
"In most cases though, we suspect that this resilience will prove temporary", they said, highlighting expectations of rising USA interest rates and worries over growing USA protectionism.
"In that sense, the Turkey situation can be a contagion not only in Europe but across emerging markets", Anderson said.
But foreign investors are staying put for a number of reasons, says Morgan Stanley's Min.
Ankara wants the United States to extradite Fethullah Gulen, a Pennsylvania-based cleric who Turkish authorities say masterminded the 2016 coup attempt in which 250 people were killed.
"This is a domestic and national struggle".
But that stickiness may not persist as apart from holding around $20 billion of government debt, foreign investors also own around $33 billion of Turkish stocks which are more vulnerable. Lindsey GrahamLindsey Olin GrahamGOP lawmaker: Every white suburban district in the country will be a swing district this year The Hill's Morning Report - Trump to GOP: I will carry you GOP senator: "Real likelihood" Dems win the House "by 10 or 12 more seats than they need" MORE (R-S.C.) tweeted Friday.
But Erdogan said Turks should not be alarmed by exchange rate movements.