ISTANBUL: The Turkish lira dropped to its weakest level against the dollar in almost eight months on Friday, prompting the central bank to increase its daily forex-selling auctions and tighten lira liquidity.
The lira traded at 2.2570 versus the greenback by 0946 GMT, firming from 2.2640 earlier after the bank said it was increasing its auction amount to a minimum $40 million from Monday, compared with $10 million previously.
The rise in the dollar this month, due to uncertainty over timing of a interest rate hike by the US Federal Reserve, has put emerging market currencies under pressure.
The lira has also been under pressure from tensions on Turkey's border with Syria, where the United States has led air strikes against Islamic State militants.
Bankers told Reuters the central bank reduced liquidity in the market to below 5 billion lira, increasing overnight market rates to double digits.
The lira hit its historic low of 2.39 against the dollar on Dec. 27, prompting the central bank to hike interest rates massively.
The bank kept its main interest rates unchanged in its monthly meeting on Thursday.
"The central bank opened a 20 billion-lira repo auction today, against a 25 billion lira-repo redemption, tightening liquidity," said Tufan Comert, a strategist at Garanti Securities, adding it might further raise the forex auction amount.
"The decision has marginal impact over the amount of forex liquidity but it signals that the central bank is ready to take action should the tension in the market intensify," said Deniz Invest economist Ozlem Derici.
Interbank rates rose to 10 percent on Friday. If interbank rates reach 11.25 percent, banks can apply to the central bank and request as much liquidity as needed at a higher cost.
This will push the average funding cost to above 8.30 percent, Derici said.
Istanbul's main share index rose 0.09 percent to 74,657.11 points, compared with a 0.31 percent fall in the broader emerging markets index.
The benchmark 10-year government bond yield rose to 9.70 from 9.64 percent a day before.
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