ISTANBUL: Turkey's lira recovered on Tuesday from record lows on Monday as analysts anticipated daily monetary tightening to support the currency, which has been hit by an emerging market sell-off and domestic political tensions.
Although the lira has slid to record depths against the dollar, Turkish Economy Minister Nihat Zeybekci said the currency does not need "strong intervention" measures and that sinking oil prices would help suppress inflation and narrow the current account deficit.
Expectations have been rising that the Federal Open Market Committee (FOMC), the U.S. Federal Reserve's monetary-policy body, will hike interest rates early next year. With a large current account deficit financed through foreign capital inflows, Turkey would be especially vulnerable to this as higher premiums in holding dollars would cause an outflow of hot money.
The emerging market sell-off has been abetted by the rouble's plunge in nearby Russia, where the currency slumped to new lows on Tuesday despite a sharp overnight rate hike, as sagging oil prices, Western sanctions linked to Ukraine crisis and rising market panic continued to hit home.
Analysts expect the Turkish central bank to support the lira by the back door, until the expected U.S. rate rise.
"We think the central bank will continue to tighten lira liquidity, thus leading the average repo funding cost higher, and sell slightly higher forex in daily auctions but wait for the impact of the FOMC for more forceful action," a note from TEB-BNP Paribas said.
The average cost of funding rose to 8.79 percent on Monday from 8.67 percent on Friday.
The Turkish central bank sets interest rates monthly but is able to tweak the average cost of funding for banks through daily repo auctions, and foreign-exchange auctions can help impact the exchange rate.
The lira firmed to 2.3590 against the dollar at 0814 GMT, having touched 2.3950 on Monday, its weakest ever in an emerging market sell-off which was exacerbated by government raids of media outlets that stoked political tensions.
Turkey's main stock index rose 0.33 percent, outperforming the emerging market index which fell 0.73 percent. The 10-year benchmark bond yield fell to 8.67 percent from 8.56 at Monday's close.
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