The Turkish lira (TRY) slipped more than 2% against the dollar on January 8 reflecting investor anxieties stemming from a renewed souring of relations between Ankara and Washington over a US demand that Turkey agrees not to attack its Kurdish allies in northern Syria.

The tensions also caused Turkey’s sovereign dollar-denominated bonds to come under pressure across the curve, with longer-dated issues falling the most. The 2041 issue fell 1.572 cents in the dollar to its lowest in three weeks with yields grinding higher towards 8%, Reuters reported.

Turkey’s President Recep Tayyip Erdogan rebuked White House national security advisor John Bolton who arrived in Ankara and appeared to row back on Donald Trump’s surprise announcement in mid-December that US forces would leave Syria imminently.

Bolton seeks guarantees
Before moving on to the Turkish capital—where Erdogan refused to meet him—following a visit to Israel, Bolton contradicted the US president, saying Washington would not leave Syria without first receiving guarantees that Turkey would not attack the Kurdish allies that have helped American forces battle Islamic State in the conflict-torn country. Trump subsequently claimed that Bolton’s stance was “no different from my original statements”, adding that the US would leave at “a proper pace while at the same time continuing to fight ISIS [Islamic State] and doing all else that is prudent and necessary!” But Erdogan, addressing parliament while Bolton was still in Turkey, remarked that “elements of the US administration are saying different things”. 

Erdogan was quoted by CNBC as adding that "We cannot accept Bolton's messages given from Israel" and as saying that Bolton made a "serious mistake" in demanding protection for the Kurdish fighters.

Bolton is concerned for the fate of the People’s Protection Units (YPG), a mainly-Kurdish militia and the primary component of the Syrian Democratic Forces (SDF). Erdogan says there is no distinction between the YPG and the Kurdistan Workers’ Party (PKK), a militant and political organisation that for more than three decades has waged an insurgency campaign in a fight for autonomy in southeastern Turkey. The PKK is listed as a terrorist organisation by Turkey, the US, Nato and the EU.

“The YPG and the PKK can never be representatives of the Kurdish people,” Erdogan told lawmakers, adding that he would not “accept and swallow” Bolton’s message.

The Americans did not know who the various Kurdish groups were, he said, also stating: "If the US evaluates them as 'Kurdish brothers' then they are in a serious delusion."

YPG denies PKK links
The YPG denies any direct links to the PKK but Turkey insists it is a national security threat and Erdogan has said an operation in the Kurdish-controlled area in northern Syria will take place soon. The populist president is under pressure from an economy on the verge of recession ahead of local elections due at the end of March and he will not want any of the nationalist-minded voters who might vote for his Justice and Development Party (AKP) to detect any weakness in his stance on the Kurds.

While he was not invited to meet Erdogan, Bolton did have a meeting with the president’s aide Ibrahim Kalin on the morning of January 8. Kalin told a press conference that he had asked Bolton about the heavy weapons and facilities that the US had handed over to the YPG.

"We expect that all the weapons that were given out will be seized," Kalin said. "We should not allow the withdrawal process to open new opportunity fields for terror organisations, including the YPG."

Kalin also said that Turkey would not seek permission from anyone to carry out military operations in Syria. There are reports that it is possibly preparing to attack the northern town of Manbij to drive the YPG to east of the River Euphrates. Washington, according to Erdogan, has been stalling on a commitment to leave Manbij as a first step in its withdrawal from Syria.

The US partnered with the Kurds in Syria in 2014 and ever since the Turks have been worried that in a post-war scenario they might be left with American arms that could be used in the insurgency battle in Turkey.

Just under a year ago Turkey invaded an enclave in Syria’s northwest and pushed the YPG out of the town of Afrin.

Wider danger in inflaming tensions
The wider danger for Erdogan in inflaming tensions with Washington over Syria is that it will undo all the good work seen in the past few months in defusing the multi-faceted diplomatic rift between the US and Turkey.

Progress in soothing relations helped the lira recover from the worst of the currency crisis it endured last year. In mid-August it fell to an all-time low of TRY7.24 to the USD but in recent weeks it has largely been trading in the TRY5.20-40 range.

By 20:20 local time on January 20, the day’s trading had seen it weaken from the January 19 close of 5.3825 to as far as 5.5150 and it stood at 5.4959. That put it around a third down against the dollar since the start of last year.