UPDATE 1-Turkey's lira at 4-month low as risk of Iraq air strikes weigh

Fri Aug 8, 2014 4:08am EDT

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By Dasha Afanasieva

ISTANBUL Aug 8 (Reuters) - Turkey's lira slipped to its weakest since March 31 on Friday as investors fled to safe havens unnerved by the prospect of U.S. air strikes in neighbouring Iraq, two days ahead of Turkey's first direct presidential polls.

U.S. President Obama authorised air strikes in Iraq late on Thursday to protect the besieged Yazidi minority and U.S. personnel in Iraq as Islamic State militants looked to be little over 30 minutes' drive from Arbil, the capital of Iraqi Kurdistan.

Thousands of Iraqis, most of them ethnic minority Yazidis, followers of an ancient religion derived from Zoroastrianism and part of Iraq's Kurdish minority, have fled to the Turkish border.

The lira reached 2.1880 against the dollar and stood at 2.1778 by 0719 GMT compared to 2.1638 late on Thursday.

Turks go to the polls on Sunday to elect their president for the first time with Prime Minister Tayyip Erdogan widely expected to win.

In contrast to his rivals, Erdogan is seeking to establish an executive presidential system in Turkey, which critics say would serve to tighten his grip, concentrating more power in the hands of a man they say has polarised Turkish society along secular-religious lines and risking a further politicisation of economic policy.

Senior party officials have told Reuters that Erdogan, as president, is likely in the beginning to work with a "council of wise men" to help him oversee top government business as he works towards enacting changes to the constitution to introduce an executive presidency.

Investors were set to focus on the economic team to gauge how effective they would be at dealing with external shocks.

Riskier assets such as Turkish equities also suffered as investors worried that a deteriorating relationship between Russia and the West could sap global growth, after Moscow imposed a one year ban on meat, fish, dairy, fruit and vegetables from the United States, the European Union, Canada, Australia and Norway.

The main Istanbul share index fell 0.98 percent to 78,070 points, underperforming the broader emerging markets index which was down 0.65 percent.

Shares in Islamic Bank Asya remained suspended having fallen sharply on Thursday. Authorities cancelled its tax collection and social security payment deals and on Friday an exclusive deal with Qatar Islamic Bank (QIB) to acquire a stake in the Turkish lender was annulled.

Bank Asya has seen its profits and capital base collapse since it found itself at the centre of a power struggle between Prime Minister Tayyip Erdogan and his former ally Fethullah Gulen, the Islamic cleric whose sympathisers founded the bank but has since become Erdogan's enemy.

The benchmark 10-year government bond yield fell to 9.4 percent from 9.46 percent at Thursday's close. (Editing by Ece Toksabay and Alison Williams)

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