ISTANBUL: The Turkish lira weakened to a seven-week low versus the dollar on Tuesday, dragged down by central bank cheap repo funding and global worries about Greece, while bond yields rose due to the lira's weakness.
The central bank injected 2 billion lira into the markets through a cheap repo auction at a fixed rate of 5.75 percent.
By 1458 GMT, the lira eased to 1.8142 against the dollar, after touching a seven-week low of 1.8198, compared with 1.8082 in late trade on Monday.
Against its euro-dollar basket, the lira traded at 2.0653, after touching 2.0730, weakening from 2.0656 on Monday.
"The cheap funding of the central bank affected the lira negatively as it decreased the average funding costs. Global worries also contributed to the lira's fall. Under these global conditions, the central bank may restart holding intraday repo auctions tomorrow," said Tufan Comert, a strategist at Garanti Securities.
The central bank surprised markets on Monday by providing cheap funds in a one-week repo auction. It had been tightening liquidity conditions since May 4 by holding intraday repo auctions at which it charges borrowers a higher rate than usual. That move came after data showed annual inflation jumped to 11 percent in April, way above its year-end target of 5 percent.
"The main reasons for the lira's fall are global dollar buying and the sell-off of riskier emerging currencies due to global risk aversion. The central bank's cheap funding has only a secondary effect on the lira's weakness under current global conditions," said Isik Okte, a strategist at Halk Invest.
Attempts to form a government in Greece collapsed on Tuesday, jolting financial markets at the prospect leftists opposed to the terms of an EU bailout could sweep to victory and nudge the euro zone crisis into a deeper phase.
"1.8250 is an important resistance level for the dollar-lira. If it is broken, then the central bank may intervene by selling directly dollars or opening forex-selling auctions," Okte said.
The yield on Turkey's benchmark bond maturing on March 5, 2014 closed at 9.60 percent, up from a previous close of 9.56 percent. Usually yields tend to fall when monetary conditions ease, as banks' lower cost of funding leaves them with more money to invest in bonds.
"We saw some investors buying bonds in intraday trade. But yields rose again when the lira weakened. The benchmark yield kept trading between 9.60-9.50 percent in thin volumes," said the manager of the treasury department at one brokerage house.
After closing at a 3-1/2 month low on Monday, Turkey's main stock index fell another 0.69 percent to 57,453.05 points, underperforming a 0.32 percent decline in the MSCI emerging markets index.
"The index dipped in line with the global sell-off due to Greece concerns. Turkish shares were positively decoupled from CEEMEA countries due to the fall in oil prices and better-than-expected profitability of banks. But, I don't expect this trend will continue as there aren't any more positive expectations to be priced in for Turkish shares," Isik Okte said.
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