ISTANBUL: Turkey's lira traded stronger as markets focused on a policy meeting of the European Central Bank later on Wednesday, giving the Turkish central bank more room to provide cheap funds, while bond yields continued to fall after previous low inflation data.
By 0829 GMT, the lira traded at 1.8382 versus the dollar from 1.8473 late on Tuesday. Against its euro-dollar basket it traded at 2.0695, from 2.0725.
"The lira firmed on the possibility that the European Central Bank (ECB) may adopt some measures helping to resolve the euro zone crisis," said Bilge Gonen, manager of forex desk at Eurobank Tekfen.
"Lira buying accelerated after the currency broke the down- side 1.85 level per dollar amid positive risk sentiment," Gonen said.
The Turkish Central Bank continued to provide cheap lira liquidity to markets through a repo auction where the rate was fixed at 5.75 percent.
Last week the central bank held a more expensive intraday repo, charging borrowers a higher rate, to help the lira recover from 1.88 per dollar, its weakest rate since mid-January.
"The emerging currencies firming in the last two days versus the dollar allowed the Turkish Central Bank to provide easier liquidity as a stronger lira reduces the upside risks on inflation," said Pinar Uslu, strategist at the Affluent Banking department in ING.
"A continuously weak lira creates a cost on inflation via a pass-through effect, which results in a higher inflation rate. The central bank tries to reach its year-end inflation forecast by switching between cheap repo auctions and expensive intraday repo auctions," Uslu said.
The central bank's year-end inflation forecast stands at 6.5 percent. Monday's data showed annual inflation dropped to 8.28 percent in May from 11.14 percent in April.
The yield on Turkey's benchmark bond maturing on March 5, 2014, stood at 9.17 percent, down from a previous close at 9.20 percent. Since the release of lower-than-expected inflation data on Monday, the benchmark yield dipped around 20 basis points.
"If the global positive sentiment continues, the benchmark yield can fall close to 9 percent. We expect it to move in a 9.30-9.15 percent in intraday trade," wrote analysts at Halk Invest.
Istanbul's main stock index was 0.42 percent up at 56,035 points, underperforming a 1.08 percent rise in the MSCI emerging markets index.
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