UPDATE 3-Turkish lira hits record low as central bank fails to calm nerves

Thu Aug 22, 2013 11:07am EDT

Related Topics

* Lira hits record low of 1.9915 to the dollar

* 10-year bond yield rises to above 10 pct

* Central bank holds $350 million forex auction (Adds auction, closing prices)

By Seda Sezer

ISTANBUL, Aug 22 (Reuters) - Turkey's lira hit a record low against the dollar on Thursday, with a $350 million forex auction by the central bank unable to calm market jitters over the future of the U.S. Federal Reserve's stimulus programme.

The central bank auction came as emerging market currencies, including the lira, were under heavy selling pressure after Fed policy meeting minutes showed its massive bond-buying programme could be reduced as early as next month.

The lira hit a record low of 1.9915 to the dollar in late afternoon trade, compared to 1.9740 late on Wednesday.

The central bank said it would apply additional monetary tightening on Thursday and Friday by not holding one-week repo auctions, halting funding from its policy rate, and said it would hold forex-selling auctions of at least $350 million.

The central bank raised its overnight lending rate, the upper end of the interest rate corridor it uses to control monetary conditions, for a second straight month on Tuesday, hiking it by 50 basis points to 7.75 percent in a surprise move to try to prevent an uncontrolled slide in the lira.

But it appeared not to be enough, with economists predicting the bank will need to widen the rate corridor by raising the lending rate further.

"Considering global liquidity worries, the current level of the overnight lending rate will not eliminate pressure on the currency," said Ali Cakiroglu, strategist at HSBC.

"We expect further interest rate hikes or even an emergency monetary policy committee meeting," he said.

Emerging markets again bore the brunt of the selling pressure as many have come to rely on cheap dollars to underpin domestic demand and fund current account deficits.

Along with Turkey, the currencies of Indonesia, Malaysia and Thailand all hit multi-year lows, while the Indian rupee ploughed another historic trough.

Turkey is particularly vulnerable, being heavily dependent on foreign inflows to finance its current account deficit, running at over 7 percent of national output.

The average funding rate rose to 7.11 percent on Wednesday from around 6.61 percent on Tuesday.

Turkey's 10-year benchmark bond yield rose to above 10 percent, closing at 10.01 percent from 9.70 percent on Wednesday.

The main Istanbul share index ended down 2.02 percent at 68,300.05 points, underperforming the broader emerging markets index, which was down 0.12 percent. (Editing by Nick Tattersall and Stephen Nisbet)

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