- It jumped 2% on Thursday and had risen in four of five sessions after touching a record low last week.
- The lira touched an all-time intraday low of 8.88 last week.
ISTANBUL: Turkey's lira mounted a short-lived rally before falling back on Friday, ahead of a Monday meeting between the US and Turkish leaders that traders said had raised expectations of a thaw in chilly diplomatic ties.
The currency firmed to as far as 8.2865 versus the dollar, its best since May 11, before shedding most gains and settling at 8.41 by 1349 GMT.
It jumped 2% on Thursday and had risen in four of five sessions after touching a record low last week.
The lira has lagged emerging market peers for months.
But it has outperformed in the run-up to the planned meeting between President Joe Biden and Turkish counterpart Tayyip Erdogan on the sidelines of a NATO summit, their first since Biden's election last year.
Several disputes have strained relations including Ankara's purchase of Russian S-400 missiles that prompted US sanctions that, in turn, have weighed on Turkey's currency and economy.
"In the short term, we can expect the Biden-Erdogan meeting to continue positive contributions to the Turkish lira and BIST (stock index)," Unlu & Co said in a client note.
Three traders told Reuters the brief market rise was in part driven by optimism that Biden and Erdogan could lift the cloud of sanctions and reverse an exodus of foreign investment since March, when Erdogan sacked a respected central bank chief.
"The Biden meeting on Monday is critical ... and the expectation for a positive outcome translated into pricing, causing the lira to appreciate," said a Turkish FX trader.
The lira touched an all-time intraday low of 8.88 last week.
It had fallen for three months due to inflation stuck near 17% and little prospects of interest rate hikes, as well as worries over Turkey's relatively high foreign debt and shrinking hopes of a rebound in tourism revenues this year.
The central bank is expected to hold its policy interest rate steady at 19% next week and wait until the fourth quarter to begin cuts, according to a Reuters poll on Friday.
Finance Minister Lutfi Elvan said the fight against inflation "is one that must be won for the future of the country."
Data showed rising expectations for year-end inflation, while separate data showed industrial production remained strong in April.
FX market implied volatility gauges have plunged since March when Erdogan ousted former central bank governor Naci Agbal. On Friday, 3-month gauges were at their lowest since February at 16.05 compared to above 35 in March.