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Lira Gains Third Day After Merkel-Hollande Pledge to Save Euro

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July 27 (Bloomberg) -- The lira gained for a third day, erasing earlier losses, after European leaders pledged to defend the euro, boosting risk appetite for emerging-market assets and outweighing the Turkish central bank’s move to increase the amount of funding for lenders.

The Turkish currency lost as much as 0.6 percent before trading less than 0.1 percent stronger at 1.8116 per dollar by 5:28 p.m. in Istanbul. The lira lagged the most today among 10 emerging-market currencies in Europe, Africa and the Middle East, reflecting the bank’s policy easing stance today.

The euro climbed to a three-week high against the greenback after German Chancellor Angela Merkel and French President Francois Hollande said their countries are “bound by the deepest duty” to keep the euro area intact. Turkey sells roughly half of its exports to Europe and is a European Union candidate. Turkey’s central bank lent 4 billion liras ($2.2 billion) today in one-week repurchase agreements at its lowest funding rate of 5.75 percent, the most since July 13.

“The constructive comments from European policymakers have supported the euro and fuelled a positive risk sentiment,” Murat Toprak, the London-based head of currency strategy for Europe, the Middle East and Africa at HSBC Holdings Plc, said in e-mailed comments.

Governor Erdem Basci, who varies rates daily within a 5.75 percent to 11.5 percent corridor to control credit growth, said yesterday he will switch the monetary policy’s focus to bank reserve requirements and may narrow the interest-rate corridor. Basci cut the forecast for 2012 consumer-price growth to 6.2 percent from 6.5 percent.

“The narrowing is not a negative-lira factor by itself. However, the market is cautious because it is unclear for now how the central bank will manage and combine the reserve requirement ratios and the interest-rate corridor going forward,” Toprak said.

Yields on two-year benchmark bonds increased one basis point, or 0.01 percentage point, to 7.78 percent, climbing for the first time in three days.

To contact the reporters on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net