August 6, 2014 / 8:05 AM / 3 years ago

Turkish assets weaken amid tensions at home and abroad

ISTANBUL, Aug 6 (Reuters) - Turkish assets fell on Wednesday as risk aversion fuelled by tension in Ukraine was exacerbated by concerns over an imminent ratings review and government pressure for interest rate cuts, all just days ahead of Sunday's presidential election.

Economy Minister Nihat Zeybekci said on Tuesday he did not expect Moody's to downgrade Turkey's credit rating, after saying on Tuesday he had a "negative expectation" for Friday's review. Moody's said it does not comment on potential rating actions.

Earlier, Zeybekci renewed his call for interest rate cuts despite recent data showing stubbornly high inflation, putting more pressure on a central bank already struggling to defend its credibility.

"In late August, the central bank is likely to, for the fourth time in a row, yield to (Prime Minister Tayyip) Erdogan's pressure to cut interest rates to stimulate growth, even though inflation risk is mounting," Nordea Bank said in a note to investors.

"Furthermore, Turkey's large external financing need combined with the prospect of less easy monetary policy from the Fed (US Federal Reserve) will curb capital inflows, also lira negative."

The Turkish lira weakened to 2.1571 against the dollar by 0744 GMT, easing off a low of 2.1661 which was its weakest since March. It stood at 2.1463 late on Tuesday.

In neighbouring Ukraine, government forces backed by warplanes kept up a military offensive to claw back lost territory from pro-Russian separatists on Tuesday while Russia conducted military exercises over the border.

Meanwhile, the impact of European sanctions against Russia and potential retaliation was being closely watched.

The benchmark 10-year government bond yield rose to 9.5 percent from 9.41 percent at Tuesday's close.

The main Istanbul share index fell 0.57 percent to 80,166.11 points, roughly in line with the broader emerging markets index, which was down 0.48 percent.

Automaker Ford Otosan's shares were down 4.48 percent after it said its net profit fell 41.8 percent year-on-year in the second quarter to 150.9 million lira, well below a Reuters poll forecast of 264.8 million lira.

Analysts said narrowing margins and increasing financing costs were to blame.

Another carmaker, Tofas posted a 23.3 percent rise in second-quarter net profit to 134.7 million lira ($62.5 million) above a forecast of 140.7 million lira. Its shares dipped 0.38 percent. (Reporting by Dasha Afanasieva; Editing by Daren Butler)

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