The lira firmed 0.2 percent on Friday following the central bank's forex auctions and comments to defend the ailing currency while shares dipped due to euro zone concerns, while the overnight jailing of the country's former armed forces chief had neutral impact on markets Turkish Central Bank sold $250 million though four forex selling auctions on Friday pushing the lira as much as 1.8715 versus the dollar.
By 1600 GMT, the lira stood at 1.8785 versus the greenback compared with 1.8825 in late trade on Thursday. The bank said on earlier on Friday it may hold intraday forex selling auctions on days deemed necessary to support additional tightening with a volume of $50 million.
"The dollar-lira rate is off from the all time high, but the long term bullish trend which has been in place since November 2010 when the central bank orchestrated lira depreciation remains intact," said Piotr Matys, analyst at 4Cast Limited. The lira weakened nearly 22 percent versus the dollar in 2011, fuelling inflationary pressures, and on December 28 hit its weakest ever level of 1.9215.
"The biggest test is yet ahead of the central bank given that the euro zone debt crisis may escalate fuelling risk aversion and putting pressure on the lira. We still expect the dollar-lira to set new all time high this year. Our view is based on expectations that external environment will deteriorate further and the central bank will have to let the lira go to preserve its forex reserves," Matys added.
Turkish Central Bank Governor Erdem Basci said on Friday the bank will use necessary instruments to ensure lira appreciation in 2012, adding the bank's first priority was for inflation to remain stable at low levels "If the lira doesn't appreciate itself, the central bank will do it. It has every necessary tools," he told a conference on monetary policy in the western city of Bursa.
Against its currency basket, the lira traded at 2.1335 compared with 2.1465 in late trade on Thursday. The central bank injected in total 6 billion lira into the market through intraday and one-month repo auctions on Friday. The main Istanbul share index closed 2 percent down at 50,182.53 points, largely underperforming the MSCI emerging markets index, which was down 0.58 percent.
"We are very correlated with external markets. Investors sell in liquid markets. Turkey is one of it. Continuing debt problems, banking system funding issues contribute to the sell-off," said Serdar Pazi, fund manager at Ata Invest. The yield on Turkey's benchmark bond maturing on December 4, 2013 was unchanged from Thursday's close of 11.49 percent, in extremely thin trading. Markets shrugged off news of Turkey's former Chief of General Staff Ilker Basbug being arrested late on Thursday as part of a probe into websites allegedly set up by the army to smear and undermine the government.