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Turkish Lira Advances After ECB Rate Cut Bolsters Risk Appetite

The lira strengthened for a second day against the dollar after the European Central Bank cut interest rates unexpectedly, boosting risk appetite for emerging markets.

The lira appreciated 1.2 percent to 1.7577 per dollar at 4:45 p.m. in Istanbul, in its biggest increase in a week, and rallied to its strongest level since Sept. 14 against an equally-weighted euro and dollar basket.

Mario Draghi announced the cut in ECB rates at his first meeting as President of the bank as euro-area leaders raised the prospect of Greece exiting the monetary union, sending bond yields soaring in Italy and Spain. ECB officials lowered the benchmark interest rate by 25 basis points to 1.25 percent.

“The market has turned to risk-on mood and the lira will perform well as the ECB provides liquidity,” Burcin Metin, a currency trader at Istanbul-based ING Bank AS, said. The lira could rally to 1.7 if it breaks 1.7480 when Turkish markets will be closed for a religious holiday in the first three days of next week, Metin said.

There is a 60 percent probability that the lira will strengthen to 1.70 per dollar in three months, according to implied probability calculated from currency options.

Benchmark two-year bond yields fell 1 basis point, or 0.01 percentage point, to 9.94 percent, a Turk Ekonomi Bankasi index of the securities showed.

The yields rose as much as 14 basis points earlier in the day after Turkey’s annual inflation rate jumped to 7.7 percent last month from 6.2 percent in September, the statistics office in Ankara said on its website today. The median estimate of eight economists surveyed by Bloomberg was 7 percent. In the month, prices rose 3.27 percent, the biggest gain in nine years.

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