Turkey’s economy showed signs of adjusting after months of overheating, sending the lira to its strongest level since mid-August. A gauge of manufacturing in September contracted the most since the global financial crisis a decade ago, while Turkish exporters shipped more goods than ever for the month.

The lira bucked a drop in most emerging-market currencies, gaining to near a key psychological level against the dollar, as optimism spread over the potential for Turkey’s detente with its western allies.

“The pace of rebalancing accelerated steadily, which suggests that the economic activity slowed down very rapidly during the third quarter,” QNB Finansbank economist Deniz Cicek said in emailed comments. “We expect further deceleration in growth and rebalancing” in trade “in the upcoming period.”

Helped by a slump in imports of consumer goods that were made more expensive by the lira’s decline, Turkey’s trade deficit narrowed by 77 percent from a year earlier.

That’s a relief for investors who’ve grown alarmed about the size of the country’s current-account gap, driven wider mainly by President Recep Tayyip Erdogan’s pursuit of growth at all costs.

With the economy now at risk of a hard landing, Turkey is redressing some of the imbalances in foreign trade that plunged it into a currency crisis. The lira has lost more than a third of its value this year as monetary and fiscal policy remained too loose, leaving the nation’s assets vulnerable against a resurgent dollar.

Following a move by the central bank to raise interest rates aggressively last month in a bid to support the currency, investors are now waiting for an end to a diplomatic spat with the U.S. to see if pressures will ease further.

Currency RallyThe lira gained as much as 2.5 percent to 5.9088 per dollar Monday. While it’s been testing the 6 level over the past few sessions, the “missing element” for a decisive break is an improvement in relations between the U.S. and Turkey, said Piotr Matys, a currency strategist at Rabobank. The next target is the Aug. 16 low at 5.6968, he said.

Erdogan met with German Chancellor Angela Merkel last week, a sign he’s trying to patch up rocky relations with the European Union.

Some investors are also hoping that a jailed American pastor will be released at a hearing on Oct. 12 to end a diplomatic standoff that saw the U.S. impose sanctions against its NATO ally Turkey.

The most recent run on the currency began with the announcement of U.S. sanctions mid-August, leaving exporters struggling to adjust to the volatility and resulting in a drop in sales abroad.

The turnaround seen in last month’s trade data indicates that exports will remain strong going forward while imports continue to drop because of weak domestic demand, according to Muammer Komurcuoglu, an economist at IS Investment in Istanbul.

Manufacturing, TradeThe country’s September purchasing manufacturing index fell to 42.7 from 46.4 in August, the lowest reading since March 2009.

Exports rose 22.6 percent in September from a year earlier while imports declined 18.1 percent, bringing the trade deficit to $1.9 billion from $8.2 billion.

Turkey is experiencing “a sudden stop and a sharp external adjustment, something which in isolation is a lira positive and possibly can explain some of the outperformance in the lira this morning,” Henrik Gullberg, a strategist at Nomura PLC in London, said in emailed comments after the data.

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