April 24, 2019 / 11:35 AM / a year ago

UPDATE 2-Turkish lira at weakest level in six months on election, U.S. strains

* Lira around 10 percent weaker against dollar this year

* U.S. ties strained over Russian missile purchases

* Central bank expected to keep rates on hold on Thursday (Updates lira value, adds banking index move)

By Daren Butler and Behiye Selin Taner

ISTANBUL, April 24 (Reuters) - The Turkish lira hit its weakest intraday level against the dollar since mid-October on Wednesday as investors weighed up risks generated by challenges to Istanbul election results and strains in relations with the United States.

The lira weakened to as much as 5.8912 from a previous close of 5.83, bringing declines this year to 10 percent, on top of a near 30 percent fall in 2018. Dollar strength contributed to the move. It was the weakest level since Oct. 15, excluding a brief overnight “flash crash” in January.

The Turkish currency stood at 5.8768 at 1538 GMT.

“Assessments of the Istanbul election challenges are continuing, this is a risk. Also, U.S. relations are being discussed again,” said one banker. “Negative lira expectations will continue to be priced in.”

Turkey’s election board on Tuesday rejected one of a series of objections by President Tayyip Erdogan’s AKP to last month’s Istanbul elections, which were narrowly won by the opposition. The AKP wants the elections annulled and re-run.

Market attention was also turning to the Turkish central bank’s rate-setting meeting on Thursday, when it is expected to keep its policy rate unchanged at 24 percent.

Fitch Solutions said the central bank has little room to ease its key policy rate over the coming months, given a need to encourage foreign investor inflows and attract domestic depositors to holding lira.

It forecast 400 basis points in policy rate cuts this year given the deterioration in the domestic economy and declining inflationary pressures.

“But the weaker lira and precarious external funding situation will likely mean a longer postponement of monetary easing,” the Fitch Solutions commentary said.

Unease about tense relations with the United States has been fuelled by the U.S. demand on Monday that buyers of Iranian oil, including Turkey, stop purchases by May 1 or face sanctions, a move to choke off Tehran’s oil revenues.

Washington reimposed sanctions in November, unilaterally pulling out of a 2015 accord between Iran and six world powers to curb Tehran’s nuclear programme. Ties with Washington have been under pressure for months over Turkey’s order for Russian S-400 missile defence systems.

Turkey’s hopes of avoiding punishing U.S. sanctions over the purchase appear increasingly pinned on intervention from Donald Trump, but the president has little leeway to counter Ankara’s many critics in Washington.

U.S. Secretary of State Mike Pompeo and several prominent U.S. senators have warned Turkey it will face penalties for buying the S-400s under legislation which calls for sanctions against nations buying Russian military equipment.

Turkish media reported last week that Turkey was considering whether S-400s which Turkey is buying from Russia could be deployed in Azerbaijan or Qatar, rather than within Turkey, as a way to overcome the dispute.

Foreign Minister Mevlut Cavusoglu was cited as telling Russian news agency Sputnik on Tuesday that deploying the S-400s in Azerbaijan or Qatar had never been on the agenda and Turkey was now talking with Russia about the timing of delivery.

The yield on the benchmark 10-year bond rose to 18.22 percent on Wednesday from 17.99 percent on Monday. Markets were closed for a public holiday on Tuesday.

The banking index was up around 2.5 percent after Reuters reported that Goldman Sachs is in talks to buy restructured Turkish loans. The index closed 1.99 percent up.

The main BIST 100 stock index rose 0.2 percent, having dipped 0.94 percent on Monday. (Writing by Daren Butler Editing by Dominic Evans and Alexandra Hudson)

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