* Lira firms from record lows but remains under strain
* Next monetary policy meeting on Jan. 21 closely watched
* Modest U.S. data points to very gradual bond buying taper
By Dasha Afanasieva
ISTANBUL, Jan 7 Turkey's lira recovered from
Monday's record lows on Tuesday, supported by
weaker-than-expected U.S. economic data that raises hopes of a
slower tapering of bond buying, but was still under pressure
from louder market calls for interest rate hikes.
The pace of growth in the U.S. services sector slowed for a
second month in December with business activity expanding at a
lower rate and new orders contracting, according to the
Institute for Supply Management on Monday.
The Federal Reserve will begin winding down, or tapering,
its $85 billion-a-month money-printing programme this month, and
emerging markets are seeing a reduction in cheap capital inflows
as a result. Turkey is among the most vulnerable with its huge
current account deficit and its reliance on external financing.
The lira traded at 2.1700 by 1144 GMT, stronger
than 2.1818 late on Monday and Monday's record low of 2.1950. It
weakened 17 percent in 2013.
While the lira has hit new lows with the real effective
exchange rate falling in November and consumption tax hikes
announced on Jan. 1 expected to boost inflation, the central
bank has stuck to its unorthodox method of supporting the
currency mainly through dollar sales.
Finance Minister Mehmet Simsek said on Tuesday that Turkey
was taking measures to keep domestic demand at reasonable levels
without hiking interest rates.
While analysts agreed that the bank remains reluctant to
raise rates, some said a hike was becoming more likely at the
next monetary policy committee (MPC) meeting on Jan. 21.
"The recent fall in the lira may now force its hand (to
increase rates," a note from Capital Economics said adding that
current policies to support the lira are not functioning as
"This month's MPC decision looks like being an extremely
close call. But on balance, we now think it is more likely than
not that the central bank will raise its overnight lending
Turkish assets have been under additional pressure since
Dec. 17 when a wide-ranging graft probe began with a series of
dawn raids and arrests and has led to the resignation of three
ministers and the reported dismissal of hundreds of police
It has revealed fractures within the ruling AK Party, and
unnerved investors in the run-up to local elections this year,
prompting a sharp selloff of Turkish assets.
The main Istanbul stock index was up 0.17 percent
at 68,137.96 points outpacing the main emerging market index
which was down 0.18 percent.
The yield on Turkey's 10-year benchmark bond
fell to 10.05 compared to 10.3 percent late on
(Editing by Alison Williams)