ISTANBUL: The Turkish lira hit its weakest level against the dollar since late January on Monday as high oil prices and data showing a wider-than-expected current account deficit fueled concern about a key problem for the energy-dependent economy.
Bond yields rose and the currency weakened as investors eyed the slow pace of liquidity tightening, which pushes up inflation concerns and bank funding costs.
The deficit, driven by Turkey's dependence on energy imports, fell to $6.00 billion from $6.57 billion in December and $6.02 a year earlier, the central bank said. A Reuters poll forecast a $5.55 billion deficit.
By 0950 GMT, the lira traded at 1.7935 versus the dollar, after touching its weakest since Jan 26. of 1.7975, compared with 1.7855 in late trade on Friday.
"We saw investors selling lira as high energy prices create a serious risk for the Turkish economy. The high current account deficit added to the lira's weakness as Turkey is the most exposed emerging economy to the rise in oil prices due to its energy dependence," said a forex trader at one big local bank.
"If the level of 1.7950 is broken permanently, the lira can weaken as far as 1.8150-1.8160 versus the dollar," the trader added.
Against its euro-dollar basket the lira stood at 2.0733, weakening from 2.0641 in late trade on Friday.
In order to tackle its alarming external deficit, estimated at 10 percent of Turkey's gross domestic product in 2011, the central bank in late 2010 switched to a complex monetary policy of high reserve requirements and a low policy rate to deter short-term capital inflows.
That should help narrow the current account deficit gradually towards the end of 2012, according to analysts, but it leaves the lira vulnerable to external shocks. The currency fell around 20 percent versus the dollar in 2011.
Since Feb. 21 when the bank decided to cut its lending rate to support the economy, the lira has weakened almost 2.5 percent versus the greenback, which has also hurt the bond market due to inflation concerns.
Many analysts expect the current account deficit to narrow gradually, based on signs of an economic slowdown from some leading indicators.
Annual growth in Turkish bank loans - closely monitored by the central bank - fell by early March to 23.62 percent from 29.5 percent at the end of 2011, according to banking regulator BDDK.
YIELDS RISE ON LIRA WEAKNESS, LIQUIDITY TIGHTENING
Turkey's two-year benchmark bond yield stood at 9.25 percent, up from a previous close of 9.18 percent.
"If the euro-dollar breaks the level of 1.30, we can see the lira weaken towards 1.80 versus the dollar. This will stimulate some selling in the bond market too," said a fixed-income trader at one bank.
The lira's weakening due to rising oil prices encouraged the central bank last week to reduce the total weekly stock funding amount to 25 billion lira from 29 billion lira a week earlier. That was seen as supportive for the lira but negative for the bond market as it increases bank funding costs and leaves them with less money to buy bonds.
"After auctions and low output data last week, the bond market is quite calm. The downward trend of bond yields will be limited as the central bank tightens liquidity," said Tufan Comert, strategist at Garanti Securities.
"We expect the bank to cut the upper end of the interest rate corridor by at least 50 basis points on March 27," he said.
Turkey's central bank meets on March 27. The overnight lending rate, seen as the upper limit of the interest rate corridor, currently stands at 11.5 percent.
The main stock index was 0.09 percent higher at 59,337 points, outperforming the MSCI emerging markets index which was down 0.4 percent.
Shares in Akfen Holding fell 0.4 percent to 9.76 lira and airport operator TAV was 0.5 percent down at 8.50 lira after France's ADP said it would buy a 38 percent stake in TAV for $874 million. Akfen holds a stake in TAV.
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