ISTANBUL: The Turkish lira weakened against the dollar on Monday as rising oil prices posed risks to inflation, offsetting data showing an improvement in the current account deficit as investors awaited a treasury bond auction on Tuesday.
Turkey had its smallest monthly current account deficit since August 2011 in June, data showed on Monday, and Finance Minister Mehmet Simsek said the economy was experiencing a soft landing.
A wide current account deficit has been a major source of concern for investors in Turkish assets, but the June data was overshadowed by worries about a rise in the oil price above $114 a barrel, its highest in more than three months. That risks adding to Turkish inflation as the country imports 95 percent of its energy needs. Inflation rose above 9 percent in July.
By 1430 GMT, the lira was weaker at 1.7950 against the dollar, from 1.7838 late on Friday. It climbed above the psychological level of 2 against its euro-dollar basket at 2.0068, from 1.9971 earlier today, and compared to 1.9887 on Friday.
The lira this month reached its strongest level against the dollar in three months at 1.7735, boosted by a fall in inflation.
The two-year benchmark yield rose slightly on Monday to 7.88 percent, from a close at 7.84 percent on Friday.
The yield fell as low as 7.47 percent earlier this month as falling inflation and a narrowing current account gap boosted demand from investors.
"The sell-off was caused by a higher oil price and its possible impact on Turkey's inflation and budget balance still continues. The market could not recover," said a fund manager.
"The impact of the current account deficit on markets is limited," he said.
Turkey's current account deficit narrowed to $4.25 billion in June from $5.83 billion a month earlier, central bank data showed on Monday, slightly above a Reuters poll forecast for a deficit of $4.1 billion. The current account deficit stood at an annualised $63.5 billion in June, down from a peak of $78.5 billion in October 2011 and below a year-end target of $65 billion, Simsek told Reuters in emailed comments.
Analysts were less optimistic than the government that the narrowing trend would continue, however, saying it could come to a halt in the remainder of the year.
"Despite the favourable picture so far, we keep our year-end (current account deficit) forecast closer to 7.5 percent of GDP since the pace of external adjustment will likely lose steam in the second half due to a pick-up in economic activity in the fourth quarter, a possible reversal in net gold exports and higher oil prices," said Ilker Domac, an economist at Citigroup.
The Turkish government said last week the current account deficit would fall to around 7 percent of GDP this year from 10 percent in 2011 and would beat the forecast in its medium-term economic programme for a shortfall of 8 percent of GDP.
"Leading data hints a slowdown in exports in July, and as a result, the narrowing in the 12-month cumulative c/a deficit could almost stall in the coming months," TEB analyst Emre Tekmen said in a note.
"The pickup in oil prices would also limit further narrowing in the current account deficit during the remainder of the year."
Turkish markets will eye a treasury auction, in which Turkey is expected to sell a 13-month zero-coupon bond on Tuesday. Istanbul's main share index closed up 0.02 percent at 65,139.82 points, outperforming a fall of 0.59 percent in the MSCI emerging markets index.
Turkish shares hit an 18-month peak last week and have rallied around 27 percent this year.
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