Lira weakens versus dollar, bonds yields slightly higher

ISTANBUL: The Turkish lira weakened against the dollar and shares plunged on Thursday as fears grew for the faltering global economy, while bond yields rebounded slightly from strong recent falls driven by rate cut expectations.

The main Istanbul share index closed down 4.2 percent at 51,945.93, underperforming the MSCI emerging markets index , which was down 3.07 percent. Turkish equities had closed 0.22 percent higher on Wednesday.

Analysts blamed dismal US data for steep falls in afternoon trade. Factory activity in the US Mid-Atlantic region plummeted in August, falling to the lowest level since March 2009, while existing home sales unexpectedly dropped in July.

"US data is a signal of recession in the American economy. It is what global markets are pricing in. This development may be influential on the Turkish central bank's rate decision next week," said Gokhan Uskuay, strategy manager at Global Securities.

The lira closed at 1.7760 versus the dollar on the interbank market compared to a previous close at 1.7650. In Friday-dated trade it rose to 1.7890.

The central bank, which since last December has engineered a policy mix that includes depreciation of the lira to narrow a record current account deficit, has begun daily dollar sales this month to prevent the currency weakening too rapidly.

Central Bank Governor Erdem Basci said last week it might increase the size of these dollar auctions.

The Turkish central bank sold $100 million on Thursday.

The governor also suggested during a television interview that the lira was 5 to 10 percent undervalued against the euro/dollar basket .

The basket stood at 2.17 by 1449 GMT on Thursday, close to its all-time high of 2.2115.

The benchmark May 15, 2013 bond yield closed higher at 7.90 percent after touching 7.85 percent on Wednesday, its lowest level since the end of January. The yield has fallen sharply recently on the possibility of future interest rate cuts. The yield was 7.86 at Wednesday's close.

Basci said last week the central bank could cut rates again if downside risks threatened economic growth.

The Turkish central bank will hold its monthly monetary policy committee meeting on Aug 23. Given steep lira depreciation, most analysts expect the bank to hold rates but think it could cut required reserve ratios (RRR) on foreign-exchange deposits or lira deposits to provide extra liquidity.

"Markets have started pricing in RRR cuts in forex and lira deposits, and the expectation that rates will remain constant. I don't expect volatility in the bonds market in the coming days, but we may see the benchmark yield fall to around 7.50 level within the next month," a bonds trader said.

Copyright Reuters, 2011