Turkey’s lira weakened on Monday as state banks scaled back efforts to defend the currency, prompting hedge funds and other traders to unwind carry trades, according to a report by Bloomberg citing sources familiar with the matter.

The lira fell by as much as 0.6% against the US dollar and was trading 0.3% lower by early afternoon in Istanbul. This marks a sharper decline compared to its average daily loss of less than 0.1% over the past three months, according to Bloomberg data.

The depreciation followed state banks' decision to sell dollars at weaker lira levels, a departure from their typical aggressive intervention to stabilise the currency. The reduced support led some hedge funds to cut their lira carry positions, further accelerating the sell-off, sources said. Outflows from overseas investors exceeded $2bn, according to the same sources.

The Turkish lira had previously been a favoured currency for carry trades, particularly after Donald Trump’s US presidential victory on 5 November, when other emerging-market currencies saw steep declines. Traders had viewed the lira as a haven due to its attractive yields and perceived stability, supported by state bank interventions.

Carry trades involve borrowing in low-interest-rate currencies and investing in high-yielding ones. Turkey’s benchmark interest rate of 50% — the second-highest globally — has made the lira particularly appealing for such strategies. However, Monday’s events signalled a shift, as traders reacted to diminished state support for the currency.

Despite losing approximately 14.5% against the dollar in 2024, the lira’s real returns have remained attractive relative to Turkey’s inflation rate, which stood at nearly 49% in October. Efforts by Turkish authorities to stabilise the lira-dollar exchange rate had previously bolstered confidence among foreign investors.