The spike of the euro against the dollar is expected to yield positive impacts on Turkey's foreign trade and current account deficit.

Continuously losing ground for the last three years and tumbling from 1.40 to 1.03, the euro-dollar exchange rate has started to recover following economic and political events both in the U.S. and eurozone. On Tuesday, the euro was quoted at 1.17 against the greenback, which was the highest rate of the last 30 months. Yesterday around noon the euro was trading at 1.16 against the dollar.

The euro began to depreciate against the dollar in 2014 when the European Central Bank (ECB) decided on monetary expansion. However, the waning expectation that U.S. President Donald Trump would deliver his pledges for economic growth, the failure of European far-right parties in elections and the recent statements of ECB President Mario Draghi which were construed as "hawkish" by the markets, which gave a boost to the euro and carried it to the highest point of the last two-and-a-half years.

Starting this year just a little over 1.05, the euro surged in January, but was devalued in February. Following four months of consecutive soaring, the euro has been able to spike against the greenback in July and provided an almost 10.5 percent yield to investors.

Euro will continue rise against dollar

İş Asset Management Economic Research Vice President Hande Şekerci told Anadolu Agency (AA) that the composition of exports and imports present an asymmetric curve as approximately half of Turkey's export revenues are denominated in euro and 60 percent of imports are recorded in dollars. "The soaring euro/dollar exchange rate leads the export price index to take over the import price index, facilitating an improvement in terms of trade in Turkey," Şekerci said.

She underscored that the surging euro shows a positive picture of the foreign trade balance, assuming that the trade volume will remain stable. Therefore, Şekerci said, the soaring euro enables a real effective exchange rate in Turkey to gain value. She further drew attention to the update of the Customs Union, saying it is of great importance since it will allow for a more expansive trade, including more industries between Turkey and the European Union.

Recently, as the expectations for U.S. fiscal policies are fading, and the ECB is sending powerful signals of a tight monetary policy in the upcoming period, the greenback has depreciated against the euro, Şekerci indicated. A 10 percent or more value increase in the euro-denominated trade index may negatively impact inflation and export growth in the eurozone.

Stating that the two percent increase in 2016 and 4 percent surge since the beginning of this year in the euro index has not reached to levels that can pose problems, Şekerci pointed out that the relatively high quotes in the euro/dollar exchange rate will continue for a while longer, yet a sharper valuation can be observed after the ECB starts to firmly tighten asset purchases.

A close above 1.1715 required for new upswing

KapitalFX Deputy Research Manager Enver Erkan stressed that the euro-dollar exchange rate is of great importance for Turkey's foreign trade.

Stating that the recovery of European economies is expected to reflect positively on Turkey's exports due to the impact on foreign demand, Erkan said Europe is still an important trading partner for Turkey and that therefore the economic course in the continent is important in terms of Turkey's foreign trade deficit.

"Since our exports will increase, the production need will also increase. Industrial production and capacity utilization rates can also be affected positively in this situation, which will cause positive developments in terms of Turkey's growth composition," Erkan said.

Recalling that the euro has been accelerating upwards in the framework of the monetary tightening expected from the ECB, which has raised euro quotations above the 1.17 level, Erkan said that the euro-dollar exchange rate is going in an upward direction.Suggesting that it is necessary to pay attention to the resistance level at 1.171 and 1.1715 in exchange rate, Erkan said that a close above the 1.1715 level is required for a new upswing. "It is necessary to pay attention to the recovery from this level and the further tightening. However, closes below 1.1550 increase the pressure for recovery," Erkan added.

Pointing out that the main point of interest of the markets is the steps taken by the U.S. Federal Reserve (Fed) and the ECB in the coming period, Erkan noted that the fact that ECB will seriously deal with monetary tightening towards autumn can comfortably take the euro-dollar exchange rate to 1.20 to 1.23.