ISTANBUL: The Turkish lira weakened on Thursday due to lower risk appetite but was not as hard hit as some other emerging markets as expectations the central bank will cut rates kept the currency close to its strongest levels in a year.
Like other currencies, the lira was hit by fading prospects for any near-term response by the US Federal Reserve to the weak global growth outlook.
"We see some depreciation in lira in line with that, but the lira is still outperforming its emerging markets peers after favourable macroeconomic data releases recently," said one Istanbul-based forex trader.
A lower-than-expected current account deficit announced on Wednesday has offered some support to government officials' forecast that the economy is on course for a soft landing after growing 8.5 percent last year.
The lira eased to 1.8193 against the dollar from 1.8076 late on Wednesday. Against a euro-dollar basket the lira traded at 2.0190, weakening from 2.0135 late on Wednesday.
"On the basket side, 2.00 would be the critical threshold, and the dollar/lira will move in the 1.80-1.83 band for now. We will also be following foreign developments, but the trend is likely to continue downward," he added.
While widening to $5.83 billion in May from $4.96 billion a month earlier, the deficit was well below a Reuters poll forecast of $6.2 billion and compared with a $7.84 billion gap in May 2011. In the first five months, the deficit fell to $27.05 billion from $37.13 billion a year earlier.
Analysts said a rate cut was not expected immediately, but the bank could lower the upper limit of its rates corridor, the overnight lending rate, from 11.50 percent currently. The borrowing rate is at 5 percent and the one-week repo policy rate at a record low of 5.75 percent.
The central bank governor said last week it may revise down its year-end 6.5 percent inflation forecast in July, fuelling expectations that the bank will cut the lending rate soon.
The bank was holding a two-hour meeting with investors and economists in Ankara on Thursday.
Based on data released on Thursday, the Turkish Central Bank's gross foreign exchange reserves rose to $84.799 billion in the week to July 6 from $83.05 billion a week earlier, according to Reuters calculations.
The yield on the March 5, 2014 benchmark bond was unchanged at 7.90 percent from Wednesday. On Tuesday, it touched a 10-month low of 7.89 percent.
"Turkey remains one of the countries with the highest bond yields. A soft landing of the economy, falling inflation and decline in the current account deficit have attracted foreign investors into buying Turkish bonds," said a bond trader at an Istanbul bank.
Turkey's main share index was down 0.8 percent to 62,545.27 points, outperforming a 1.67 percent decline in the MSCI emerging markets index.
Shares in Finansbank, in which the free float is only 0.2 percent, edged up 0.28 percent after US insurer Cigna Corp signed a deal to buy a 51 percent stake in Finansbank's wholly owned insurance unit Finns Emeklilik for 85 million euros ($104 million), giving it access to the fast growing Turkish market.
Shares in flag-carrier Turkish Airlines fell 0.59 percent, dragged lower by the general negative sentiment, despite announcing a 20 percent surge in first half passenger numbers.
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