January 6, 2014 / 9:36 AM / 4 years ago

UPDATE 1-Turkey's lira hits record low on graft probe, Fed tapering

(Adds analyst comment, details)

ISTANBUL, Jan 6 (Reuters) - Turkey’s lira hit a new record low against the dollar on Monday, dampened by investor caution over a corruption investigation, concern about China’s growth outlook and U.S. Federal Reserve stimulus reduction.

The lira traded at 2.1905 by 0902 GMT, weakening from 2.1774 late on Friday, having reached a previous record low of 2.1885 on Thursday. It weakened 17 percent in 2013.

The Federal Reserve will begin winding down, or tapering, its $85 billion-a-month money-printing programme this month, and emerging markets are seeing foreign investment pull back as a result. Turkey is among the most vulnerable with its huge current account deficit and its reliance on external financing.

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 dismissal of dozens of police officers.

It has revealed fractures within the AK Party, which has ruled for over a decade, and unnerved investors in the run-up to local elections this year, prompting a sharp selloff of Turkish assets.

While the lira has hit new record lows, the central bank has stuck to its unorthodox method of supporting the lira mainly through dollar sales.

It has sold $17.6 billion in forex auctions since the beginning of last year. This month it will sell a total of $3 billion, it said previously. But pressure for interest rate hikes is growing as the lira’s slide continues.

Standard Bank’s Tim Ash said Turkish assets would continue to be put under pressure until there was an improvement in the political situation or the central bank started hiking interest rates.

The main Istanbul stock index was up 0.42 percent at 66,245 points but outpaced the main emerging market index which was down 0.8 percent.

The yield on Turkey’s 10-year benchmark bond was steady at 10.53 percent compared with 10.52 late on Friday. (Reporting by Seda Sezer, editing by Elizabeth Piper)

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