The lira tumbled past 2 per dollar as Syria risks mounted and central bank Governor Erdem Basci pledged to keep the overnight lending rate on hold.
The currency weakened as much as 2 percent to 2.0368 a dollar, the lowest since Bloomberg began monitoring the data in 1981, and traded 1.7 percent lower at 2.0307 as of 5:20 p.m. in Istanbul. The yield on 10-year bonds increased 10 basis points to 10.28 percent.
The lira crossed 2 per dollar for the first time after U.S. Secretary of State John Kerry said Syria will be held accountable for using chemical weapons. Turkey will join a coalition against Syria if the United Nations fails to take action, Milliyet newspaper reported, citing Foreign Minister Ahmet Davutoglu. Raising the overnight lending rate beyond 7.75 percent would be “harmful” and the central bank will “stand by our word” not to raise it, Basci said in an interview with the Anatolia News Agency today.
“Combined with the uncertainty over a multiparty military intervention in Syria, the comments are negative for Turkey’s financial markets,” Ibrahim Aksoy, an economist at Seker Invest in Istanbul, wrote in an e-mailed note.
The central bank raised the top end of its three-pronged rates corridor by 50 basis points, or 0.5 of a percentage point, on Aug. 20, while keeping the benchmark one-week repurchase rate and the overnight borrowing rate unchanged. It provides funds to banks at the higher rate at daily auctions.
Policy makers have tried to shore up the lira by tightening monetary policy since this month’s rate decision failed to fend of lira weakness. It sold $750 million at auctions in the last three days and refrained from providing funds at the 4.5 percent repo rate, the lowest lending rate in its corridor, between Aug. 20 and Aug. 26. The lira depreciated 4 percent in the past five days, the worst performer among emerging-market currencies in Europe, the Middle East and Africa.
“Basci explicitly states that he won’t be raising interest rates,” Julian Rimmer, a trader at CF Global Trading U.K. Ltd. in London, said in an e-mailed note. “This is a negative, reality-denying development.”
Policy makers have drained $8.7 billion from Turkey’s foreign-exchange reserves since June 11 to support the lira. The central bank had $109 billion in reserves as of Aug. 16, it said last week. Excluding foreign exchange from banks, less than $50 billion is available for dollar auctions, London-based Luis Costa, an emerging-market currency strategist at Citigroup Inc., said Aug. 22.
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