The Turkish lira plunged on Friday, raising questions about the country's financial stability, as investors anxious about the president's unorthodox economic policies and a dispute with the United States that has led to sanctions.
That turned into a rout on Friday, with the lira diving as much as 18 percent at one point, the biggest one-day drop since Turkey's 2001 financial crisis.
Waves from the crisis spread overseas, with investors selling off shares in European banks with large exposure to the Turkish economy. But invoking national security is the only way to square Trump's policy with USA law and WTO rules.
The 10-year yield slid below 2.9 percent as price data reinforced the Federal Reserve's rate-hike intentions and investors sought havens.
President Donald Trump administration announced that it would higher the tariffs on Turkish steel and aluminum over the detainment of American evangelical pastor Andrew Brunson, who was arrested in 2016. Trump said on Twitter.
Erdogan replied that Turkey will not back down despite Trump's sanctions policy and said he would answer with mirror retaliation.
"In that sense, the Turkey situation can be a contagion not only in Europe but across emerging markets", Anderson said.
Financial upheaval there risks further destabilising an already volatile region.
But while Mr Erdogan - who vowed Turkey would win the "economic war" - favours lowering borrowing costs to fuel credit growth and economic expansion, others would rather see interest rates rise.
"Turkey expects other member countries to abide by global rules", the country's trade ministry said in a statement.
Turkey shaken by financial fears, President Trump rattles it further
A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul, Turkey August 2, 2018. But invoking national security is the only way to square Trump's policy with US law and WTO rules.
The Turkish president took aim at the USA in his address, claiming "some countries have engaged in behaviour that protects coup plotters and knows no laws or justice". "Failure to reverse this trend of unilateralism and disrespect will require us to start looking for new friends and allies", Erdogan said.
In a tweet, he said he was imposing duties of 20 per cent on Turkish aluminium and 50 per cent on steel.
Erdogan spoke briefly Thursday night and alluded to problems with the currency, saying "various campaigns" were underway, adding: "If they have dollars, we have our people, our righteousness and our God". It was almost 6 per dollar early Friday morning in D.C.
"If they have their dollar, we have the people, we have Allah", he said, as the lira continued to fall.
Yet even US firms that have disclosed relatively little exposure to Turkey fell as that country's crisis escalated Friday, with Citigroup Inc. down the most since May.
In many nations, including the USA and European Union states, the central bank is independent of government and no one can tell it what to do with interest rates. According to a source in Erdogan's office, the two said they were pleased with the positive direction in their economic and trade ties and with the ongoing cooperation in the energy and defense sectors.
"It is hard to imagine how the United States and Turkey fix their relationship, which was already faltering, after this episode". Gulen denies the allegation.
Brunson's charges include spying for the PKK, listed as a terrorist group by both the US and Turkey, and the Fetullah Terrorist Organization (FETO), the group behind the defeated coup attempt in Turkey of July 2016. He offered no further details.
Why is the White House hitting Turkey with tariffs?