ISTANBUL: The Turkish lira eased slightly, hurt by renewed euro zone worries on Wednesday, a day after the central bank said it would stick to its tight policy stance, which is expected to support the lira.
By 0748 GMT, the lira traded at 1.8370 versus the dollar , weaker than 1.8290 late on Tuesday. Against a euro-dollar basket it stood flat at 2.0616.
The 10-year Spanish government bond yield hit a six-month high on Tuesday, and the sell-off in Spanish bonds has driven up their risk premium over safe-haven German Bunds to euro-era highs this week.
"The central bank does what it can to support the lira. But European markets are weak and there are worries about Spain. I expect the sell-off to continue until June 17. The market is trying to price in the situation in Greece and Spain," said Suha Yaygin, an emerging markets trader at TD Securities.
Greeks will vote on June 17 after an election early this month that proved inconclusive, with a victory for anti-bailout parties seen threatening to lead to the country's exit from the euro, the currency of Turkey's main trading partner.
Turkey's central bank kept all key interest rates on hold at its monthly policy meeting on Tuesday and said it would use extra short-term liquidity tightening if needed to prevent any deterioration in inflation expectations.
Since the start of 2012, the central bank has resorted several times to additional tightening by providing expensive liquidity through intraday repo auctions, aiming at prevent pass-through effects of lira's weakness into inflation.
Turkish consumer price inflation stands at 11.1 percent, far above the central bank's year-end target of 5 percent.
"Lira is trading in line with other emerging currencies. Investors who buy lira know there is the central bank support behind the currency. So, they are more confident. The high interest rate on lira makes it attractive," Yaygin said.
The yield on Turkey's benchmark bond maturing on March 5, 2014, stood at 9.42 percent, almost unchanged from a previous close at 9.40 percent.
Traders said investors are buying long-term bonds on prospects that tight monetary policy will keep inflation in check.
The central bank has maintained a complex policy mix since late 2010 based on variable daily injections of lira funding, a flexible corridor between base lending and borrowing rates and high bank reserve requirements, to keep inflation and a huge current account deficit in check.
The main stock index was 0.89 percent down at 54,955 points, in line with a 1.01 percent decline in the MSCI emerging markets index.
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