Turkish assets were supported on Wednesday after Moody's raised Turkey's credit rating, citing significant improvement in public finances, but shares in Istanbul were virtually flat on Thursday as investors globally were disappointed by the US Federal Reserve's decision to expand its monetary stimulus in only a limited fashion.
By 0831 GMT, the lira was trading at 1.7978 versus the dollar, from 1.7925 late on Wednesday. Against a euro-dollar basket, the lira was virtually flat at 2.0365.
"There is general profit taking in markets after the disappointment over the Federal Reserve decision. All emerging currencies are affected. The weakening of the lira is slightly less than the average of the European currencies' losses," said Tufan Comert, strategist at Garanti Securities.
"Today there is a critical policy meeting of the central bank. We don't expect a rate cut today. But, if the central bank indicates such a move in today's meeting for the period ahead, the lira would weaken further," Comert said.
The central bank will release its statement on the meeting at 1100 GMT. Analysts expect the bank to keep its benchmark one-week repo rate, at a record low of 5.75 percent.
The bank has been reluctant to raise interest rates as it seeks to ensure an economic slowdown this year is not too sharp. Instead it has used liquidity tools to bolster the lira, to limit inflationary pressures and pressures on the current account deficit.
The bank's complex policy mix principally involves variable daily injections of lira funding, a flexible corridor between overnight lending and borrowing rates, high bank reserve requirements, and a low policy rate.
Most recently, the bank said it could raise gradually the limit of lira reserves that banks can keep in foreign currency to 60 percent from 45 currently.
"The Turkish economy is slowing down. The situation in Europe is uncertain. Today's PMI showed Turkey's main trade partner Germany has also been affected seriously by the crisis. That's why the Turkish central bank may opt for preemptive action. But we expect this to occur in the fourth quarter," Comert said.
The lira firmed as far as 1.7881 versus the dollar on Wednesday, its strongest since mid-May, after Moody's said it raised Turkey's sovereign debt rating by one notch to Ba1 from Ba2 and maintained its positive outlook.
The yield on the benchmark bond inched down to 8.96 percent ahead of the central bank policy decision, from a previous close at 9.01 percent.
"Yields are falling as we expect a dovish stance from the central bank," a fixed-income trader said.
Following Moody's comments on Wednesday, the benchmark yield fell to 8.92 percent, the lowest since the end of February.
The bank has been applying a hawkish monetary policy since its meeting in March to tackle inflationary pressures.
Istanbul's main stock index was 0.23 percent higher at 59,536 points, outperforming a 1.16 percent dip in the MSCI emerging markets index.