The Turkish lira hit a two-week low versus the dollar on Friday on a threat of U.S. sanctions, while emerging market currencies and stocks were set for their sixth straight week of gains on global economic recovery hopes.
The lira weakened 1.5pc to trade past 8.00 per dollar at one point after sources told Reuters the United States is poised to impose sanctions on Turkey over its purchase of Russian S-400 air defence systems last year.
The long-anticipated step, which is likely to infuriate Ankara and severely complicate relations with the incoming administration of President-elect Joe Biden, could be announced any day, the sources said.
The currency was last traded at 7.9717 per dollar.
"The sanctions are expected to target Turkey's Presidency of Defence Industries and its head Ismail Demir, which is on the mild end of the spectrum (not surprising given Trump's reluctance to impose sanctions on Turkey in the past)," Elsa Lignos, RBC Capital Market's global head of FX strategy, wrote in a note.
Lignos added that the lira's negative reaction has been contained, with the decision left pending for Biden who could impose stronger sanctions.
Meanwhile, European Union leaders have agreed to prepare limited sanctions on Turkish individuals over an energy exploration dispute with Greece and Cyprus.
The lira has been among the worst performing EM currencies this year as concerns over depleted foreign reserves and high inflation have overshadowed President Tayyip Erdogan's rhetoric of market-friendly reforms.
The currency lagged its EM peers, which were on course for a small but sixth straight week of gains thanks to a faltering dollar.
The Russian rouble slipped on the day even as Brent crude futures rallied past $50 a barrel. Russia is among the world's top three oil nations.
EU leaders were set to extend economic sanctions imposed on Russia for its intervention in Ukraine by another six months.
Eastern European currencies including the Hungarian forint and Polish zloty fell against the euro which firmed after the European Central Bank unveiled fresh stimulus measures on Thursday broadly in line with expectations.
Meanwhile, Sri Lanka's sovereign dollar bonds fell after rating agency S&P slashed the country's credit rating to "CCC+/C", citing concerns that risks to the island nation's debt servicing capacity have risen.
The MSCI's EM equities index was set to for a 0.6pc weekly gain lifted by record gains for Asian stocks on optimism over faster economic rebound in the region and encouraging COVID-19 vaccine developments.