Turkish lira touches new lows, government's popularity in question
* Lira hovering around new record lows
* Reuters poll says lira expected to stabilise in coming months
* Technical issue on stock exchange, trading to resume after 1210 GMT
By Dasha Afanasieva
ISTANBUL, Jan 9 (Reuters) - Prime Minister Tayyip Erdogan's public feud with judiciary and police force over a corruption scandal shaking his government continued to weigh on Turkish markets on Thursday, with the lira touching record lows.
Since mid-December Turkish assets have been battered by a wide-ranging corruption investigation which came to light with a series of dawn raids and arrests that led to the resignation of three ministers. Erdogan has rejected the accusations as an attempt by a U.S.-based cleric to taint his AK party before March local elections that will be a test of his support.
There is no clear sign yet of the scandal undermining his popularity but it has exposed some dissent in his AK Party.
"A weak showing by the AKP in the local elections might give grist to the mill of his opponents within the AK party - perhaps inspiring (Presideent Abdullah) Gul and those around him to offer an alternative platform to sustain the AK party's legacy," Timothy Ash, head of emerging market research at Standard Bank said in a note.
But ratings agency Moody's, which raised Turkey's sovereign credit rating to investment grade last May, said on Wednesday that domestic political risk was already embedded in its rating for the country.
The lira slipped slightly to 2.1880 by 0950 GMT from 2.1776 late on Wednesday having touched an all time low of 2.1980 earlier in the morning.
But a Reuters poll showed on Wednesday that the lira is likely to stabilise against the dollar in coming months despite pressure on it due to capital flows out of emerging markets and political uncertainty.
Most traders expect the central bank eventually to hike interest rates to support the currency, but it has so far refused to do so for fear of slowing economic growth, especially before the elections.
The main Istanbul stock index, which last updates at 0752 GMT because of a technical fault, was trading down 1.18 percent at 66,536.95 points, underperforming the main emerging market index, which fell 0.55 percent.
The stock exchange said that having stopped the first trading session early, it would open the second session at normal time which is between 1210 and 1215 GMT.
The yield on Turkey's 10-year benchmark bond eased to 10.09 percent from 10.18 percent late on Wednesday. (Editing by Ralph Boulton)
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