The Turkish lira popped against its US peer to finish the holiday-shortened trading week. The lira enjoyed one of its best sessions in foreign exchange markets this year, buoyed by the central bank tightening monetary policy as part of efforts to regain credibility among investors. Could the lira, which has been one of the top-performing currencies against the buck this year, set itself up for a tremendous 2021 performance?

On Thursday, the central bank held its final policy meeting of 2020, raising the benchmark one-week repo interest rate by 200 basis points to 17%. The market had penciled in a rate hike of 150 basis points.

This was the second consecutive rate hike, with the first one taking place last month when the central bank raised rates by 475 basis points.

Despite a myriad of economic risks, the central bank stated that it will continue to maintain a tightening directive until officials notice “a permanent fall in inflation.” The institution alluded to risks from a weak lira, slumping domestic demand, and rising commodity prices.

Ankara is also trying to strike a fine balance between while economic uncertainty reigns supreme throughout global financial markets, the domestic economic recovery is proceeding as expected.

Turkey still has a long way to go to recover, but forex investors are indicating that they are willing to give the new policymakers a try. For example, forex reserves have climbed for the fifth straight week, increasing from $40.373 billion in the week of November 15 to $49.8 billion in the week ending December 18.

Ultimately, the lira has been one of the top-performing currencies against the US dollar for the last two months. However, the lira is still down about 30% year-to-date after recording several sessions of fresh all-time lows.

The USD/TRY currency pair fell 0.65% to 7.5903, from an opening of 7.5521, at 19:34 GMT on Thursday. The EUR/TRY tumbled 0.66% to 9.2484, from an opening of 9.3101.