* Sell-off stems from U.S. trial against gold trader
* PM, Economy czar say problems temporary
* Some analysts see possibility of emergency measures
* Dollar up 17 pct against lira since mid-Sept (Recasts, adds PM, economist)
By Behiye Selin Taner and Daren Butler
ISTANBUL, Nov 22 (Reuters) - Turkey’s prime minister and its economy czar both attempted on Wednesday to talk up a lira currency that has hit record lows for two days running, telling investors that a widening rift with the United States was “temporary”.
Investors have hammered the lira on worries about relations with Washington and nagging concern about pressure from President Tayyip Erdogan on the central bank. The dollar has surged some 17 percent against the currency since mid-September.
Much of the worry stems from the U.S. trial of Turkish gold trader Reza Zarrab, who is accused of violating U.S. sanctions on Iran. Ankara has described the case as a “clear plot against Turkey”, and has accused the U.S. prosecutors of having links to the cleric it blames for last year’s failed coup.
“Turkey and the United States are two allies, so lawyers should do their job and politicians should do theirs. Let’s never allow lawyers to harm relations between the two countries,” Prime Minister Binali Yildirim said in a speech.
“We will take every measure as the government, the central bank will take its own measures as well. These (issues) are temporary.”
Mehmet Simsek, the deputy prime minister in charge of the economy, who represents the more Western-facing wing of Erdogan’s cabinet, also attempted to calm the markets.
“There are serious fluctuations in Turkish markets recently, we need to understand this calmly, correctly and without panicking,” he said in a speech. “These are temporary, the problems with the United States and the West are temporary.”
At 1500 GMT, the lira stood at 3.9495 to the U.S. currency, firmer on the day after hitting a record low of 3.9800.
On Tuesday, the Turkish central bank (TCMB) responded to the sell-off with emergency measures to tighten liquidity, although those have so far failed to shore up confidence. Investors say that, rather than tweaking policy, the central bank needs a straightforward rate increase.
“The TCMB’s veiled rate hike yesterday was a step taken to buy time ahead of the Dec. 14 MPC (monetary policy committee) meeting and avoid an interim meeting,” said Enver Erkan, deputy research manager at Reel Kapital Securities .
“We do not see this step having a positive impact in the market because it is not a sufficient move,” he said. “Hence we expect the negative trend in the lira to continue.”
Foreign investors, needed by Turkey to finance its large budget and current account deficits, have deep concerns about political pressure on the central bank. Erdogan, who wants lower interest rates to fuel lending and construction, said last week a lack of government intervention in policy had left Turkey saddled with high inflation.
“We’re not very positive on Turkey in the near term. Eventually, hopefully enough pressure is brought to bear that they push rates up and the currency then does better,” said Said Haidar of Haidar Capital Management, a $365 million global macro hedge fund.
“It’s an ugly looking situation made worse by political issues.”
The sell-off has increased speculation that the central bank would drastically raise rates before its next meeting - similar to the emergency, late-night rate increase it made in January 2014 to put a floor under the lira.
“We think the pace of depreciation might bring such move earlier than the scheduled MPC meeting at December 14th,” Gokce Celik, chief economist at QNB Finansbank, said in a note to clients this week. “In other words, we now see an emergency meeting a non-negligible possibility.”
At the 2014 emergency meeting, the central bank lifted its one-week repo rate from 4.5 percent to 10 percent. However, that was precipitated by an 18 percent rise in the dollar against the lira in a little more than a month - a more accelerated sell-off than this time.
“When we’ve seen emergency interest rate hikes in Turkey, they’ve tended to be preceded by a larger fall in the lira than the one we’ve seen recently,” said William Jackson of Capital Economics in London.
The yield on the benchmark 10-year bond rose to 13.08 percent in spot trade on Tuesday from 12.68 percent a day earlier. It dipped to 13.01 percent in Wednesday-dated trade.
The main Istanbul share index rose 0.66 percent.