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The Turkish lira headed for its biggest in more than a year, defying a broader risk-on rally in emerging markets as locals took advantage of recent strength in the currency to buy dollars.

The lira weakened 3.5 percent to 7.7912 per dollar, its sharpest decline on a closing basis since March 2019, after surging in the wake of a long-anticipated rate increase last week. Thin liquidity exacerbated the on Monday, triggering stop-losses on lira long positions, according to three traders at local banks who declined to be identified because they’re not authorized to comment publicly. Some overseas investors are also taking profits, they said.

Geopolitical jitters may have also contributed to the drop. German naval personnel boarded and searched a Turkish ship on suspicion it was violating the arms embargo on Libya, outraging Ankara and further straining its already fraught relations with the European Union.

According to Ibrahim Aksoy, chief economist at HSBC Asset Management in Turkey, the declines may be brief and the lira may mimic its trajectory after the meltdown of August 2018 when the currency pared its initial rally after a shock rate hike, but appreciated in the weeks that followed. With one of the most appealing risk-adjusted carry trade returns in emerging markets, the lira may rebound against the dollar to below 7.50 in the coming weeks, he said.

The currency climbed more than 10 percent in anticipation of Thursday’s hike after President Recep Tayyip Erdogan’s apparent embrace of market-friendly policies and a government shakeup earlier in the month. Retail and corporate investors have seized on those gains as a chance to increase their hard-currency holdings, Aksoy said.

At the same time, some investors question how long the apparent shift can last. Erdogan repeated his unorthodox view that high interest rates cause inflation at the end of last week, briefly causing the lira to slump.

*Bloomberg