ISTANBUL: Turkey's lira firmed on Tuesday but failed to recoup four days of losses as violence in neighbouring Iraq where 80 Turks have been held captive for a week kept the investors on edge.
Militants from the Islamic State of Iraq and the Levant group have routed Baghdad's army and seized the north of the country in the past week, threatening to dismember Iraq and unleash all-out sectarian warfare with no regard for national borders.
US President Barack Obama continued to consult with his national security team on options for easing the crisis which teetered on the edge of all-out sectarian warfare with no regard for national borders.
The lira firmed to 2.1384 against the dollar by 0807 GMT, compared with 2.1435 late on Monday.
The yield on the 10-year benchmark government bond yield stood at 9.11 percent compared with 9.15 percent at Monday's close.
The main Istanbul share index was up 0.77 percent at 78,245.40, outperforming the broader MSCI index of emerging markets, which was almost flat.
"Lira assets significantly underperformed yesterday and the main driver was the escalation in the geopolitical risks due to the tension in Iraq," said Gokce Celik, analyst at Finansbank.
"The relatively better performance of today owes to the absence of further bad news."
With Turkey relying on imports for almost all of its energy needs and oil prices not far from nine-month highs, investors eyed ISIL's advance as it threatened to capture a key oil refinery.
"If ISIS moves to the south, I would expect to see a much more dramatic price reaction in the oil market," Celik said.
Brent crude prices kept near $113 a barrel amid a worsening security situation, although Iraq's 3.3 million barrels per day of oil exports have so far not been affected.
It is also Turkey's energy imports that make lira-denominated assets especially responsive to changing global liquidity conditions.
Monetary tightening in the world's biggest economy was firmly in focus in Turkey ahead of US Federal Reserve's interest rate decision on Wednesday (1830 GMT), followed by Federal Reserve chair Janet Yellen's quarterly news conference.
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