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Turkish Lira Drops Fourth Day as Loose Policy Trumps Carry Trade

The lira weakened for a fourth day to its lowest level this month as the central bank continued to lend at its lower rate, reducing the appeal of carry trade.

The currency depreciated 0.2 percent at 1.7681 per dollar as of 5:40 p.m. in Istanbul, trimming its gains this year to 6.8 percent. Yields on the benchmark two-year debt increased six basis points, or 0.06 percentage point, to 9.28 percent. Carry trade refers to selling currencies with lower interest rates to buying those offering higher yields. The central bank lent 4 billion liras ($2.3 billion) today at 5.75 percent.

Turkey’s central bank has been lending at its lowest 5.75 percent benchmark interest rate every day since Jan. 10, pushing the overnight repurchase agreement rates on the interbank market to 6.60 percent yesterday, the lowest since October, and 6.8 percent today. Yields on the two-year debt have fallen 173 basis points this year after soaring 390 basis points last year.

“The fall in short-term rates and the excess lira liquidity in the market reduces carry from lira long positions,” Eren Yardimci, an emerging-market currency trader at UBS AG in Zurich, said in e-mailed comments.

The Turkish Treasury raised 8.1 billion liras at lower yields, meeting almost all of its monthly borrowing target in five issues this week spread over three auctions.

The Treasury in Ankara today sold a total net 3.1 billion liras of benchmark December 2013 fixed-coupon bonds at an average annual yield of 9.24 percent today, compared with 10.28 percent in the Jan. 24 auction.

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