ISTANBUL: The Turkish lira hit its weakest level in two weeks on Wednesday, caught in a global selloff of riskier assets, and the central bank sought to shore up the currency by making liquidity tighter and more expensive.
Short-term yields edged up due to the extra monetary tightening, pushing banks' funding costs up.
By 0949 GMT, the lira traded at 1.7925 versus the dollar, weaker than 1.7810 late on Tuesday. Against a euro-dollar basket it weakened to 2.0576, from 2.0475.
"The lira eased following the euro's weakening versus the dollar due to Greece concerns. So, the central bank continued with its 'exceptional days' policy today. It also reduced the total funding stock in the market," said a manager in one brokerage's treasury department.
The "exceptional days" policy mainly consists of replacing repo auctions where lira are offered at a cheap fixed-rate of 5.75 percent, with intraday repos when the lira is injected at almost twice that rate.
"We expect the central bank to apply its exceptional days policy more frequently," the manager added, linking the market tensions to heightened worries about whether Greece can stay in the euro zone.
The Turkish central bank injected 3 billion lira into the market in an expensive intraday repo, on the same day as a repo of 5 billion lira is due to mature - a liquidity tightening seen as supportive for the lira.
"The uncertainty in global markets will continue to affect the lira negatively. The important technical levels are 1.7880-1.79 for the dollar-lira. If this level is not broken, there is no need to be negative for the currency," wrote Fatih Keresteci, a strategist at HSBC.
The lira broke the level of 1.79 versus the dollar in early afternoon trade on Wednesday but slightly firmed again to 1.7893.
The average yield at the intraday repo auction stood at 10.67 percent, almost double the fixed rate of 5.75 percent applied to the bank's usual repo auctions.
Turkish Deputy Prime Minister Ali Babacan said on Wednesday the Turkish Central Bank would continue with its tight monetary policy stance.
It returned to the "exceptional days" policy after high April inflation data last week.
The central bank has sought to manage inflation and the nation's current account deficit by using a complex set of tools including the policy rate, the one-week repo rate, reserve requirements, liquidity management and the corridor between its overnight lending and borrowing rates.
The yield on the benchmark bond maturing on March 5, 2014 edged up to 9.58 percent from a previous close at 9.53 percent.
"The extra tightening of the central bank affects short-term bonds negatively ... This trend may continue in the coming period," wrote Keresteci.
The main stock index was up 0.22 percent at 58,876 points, outperforming a 0.97 percent decline in the MSCI emerging markets index.